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Financial Accounting 1 by Harold
Financial Accounting 1 by Harold
Financial Accounting 1 by Harold
Accounting 1
SUBJECT NO. 1
Study Pack
STRATHMORE
UNIVERSITY
DISTANCE LEARNING CENTRE
Email: dlc@strathmore.edu
Copyright
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording
or otherwise without the prior written permission of the copyright owner. This publication may not
be lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent
of the copyright owner.
ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and
Secretaries National Examination Board (IASNEB); Chartered Institute of Management Accountants (CIMA); Chartered
Association of Certified Accountants (ACCA).
iii Instructions for Students
This study guide is intended to assist distance-learning students in their independent studies. In addition, it is only for the personal use of the purchaser, see
copyright clause. The course has been broken down into eight lessons each of which should be considered as approximately one week of study for a full
time student. Solve the reinforcement problems verifying your answer with the suggested solution contained at the back of the distance learning pack. When
the lesson is completed, repeat the same procedure for each of the following lessons.
At the end of lessons 2, 4, 6 and 8 there is a comprehensive assignment that you should complete and submit for marking to the distance learning
administrator.
SUBMISSION PROCEDURE
1. After you have completed a comprehensive assignment clearly identify each question and number your pages.
2. If you do not understand a portion of the course content or an assignment question indicate this in your answer so that your marker can respond to
your problem areas. Be as specific as possible.
3. Arrange the order of your pages by question number and fix them securely to the data sheet provided. Adequate postage must be affixed to the
envelope.
4. While waiting for your assignment to be marked and returned to you, continue to work through the next two lessons and the corresponding
reinforcement problems and comprehensive assignment.
On the completion of the last comprehensive assignment a two-week period of revision should be carried out of the whole course using the material in the
revision section of the study pack. At the completion of this period the final Mock Examination paper should be completed under examination conditions.
This should be sent to the distance-learning administrator to arrive in Nairobi at least five weeks before the date of your sitting the IASNEB Examinations.
This paper will be marked and posted back to you within two weeks of receipt by the Distance Learning Administrator.
FINANCIAL ACCOUNTING 1
iv
CONTENTS
ACKNOWLEDGMENT .......................................................................................................................ii
INSTRUCTIONS FOR STUDENTS ..................................................................................................iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION ............................................................ vii
LESSON ONE ...................................................................................................................................... 1
INTRODUTION TO ACCOUNTING ................................................................................................................... 1
LESSON TWO .................................................................................................................................... 50
FINAL ACCOUNTS................................................................................................................................................... 50
LESSON THREE .............................................................................................................................. 101
ACCOUNTING THEORY ..................................................................................................................................... 101
LESSON FOUR ................................................................................................................................. 117
ADJUSTMENTS TO FINAL ACCOUNTS ........................................................................................................ 117
LESSON FIVE .................................................................................................................................. 202
FURTHER ADJUSTMNETS TO ACCOUNTS ................................................................................................. 202
LESSON SIX ..................................................................................................................................... 259
OTHER ASPECTS OF FINAL ACCOUNTS .................................................................................................... 259
LESSON SEVEN .............................................................................................................................. 344
PARTNERSHIPS....................................................................................................................................................... 344
LESSON EIGHT ............................................................................................................................... 431
COMPANY ACCOUNTS ....................................................................................................................................... 431
LESSON NINE................................................................................................................................. 502
REVISION AID......................................................................................................................................................... 502
FINANCIAL ACCOUNTING 1
Course Description vi
The subject gives a thorough and comprehensive introduction to double bookkeeping. It develops the students understanding of the
final; accounts of business and that of clubs and societies, and the treatment of capital expenditure and the purchasing of stock.
Following this it deals with the cashbook and bank reconciliation preparation of accounts from incomplete records. Its prime purpose
is to pre[pare candidates for the Section One examination of the CPA Kenya accountancy paper and is based on the materials used to
prepare students at Strathmore School of Accountancy.
FINANCIAL ACCOUNTING 1
Lesson One 1
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the users of this information to permit
informed judgment
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either cash is received or paid out. Examples of
these transactions include selling goods, buying goods, paying employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on these transactions. If a firm employs a
new staff member then this may not be an accounting transaction. However when the firm pays the employee salary, then this is related to
accounting as cash involved. This has an economic impact on the organization and will be recorded for accounting purposes. A process is put in
place to collect and record this information; it is then classified and summarized so that it can be reported to the interested parties.
FINANCIAL ACCOUNTING 1
Course Description 2
ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like to have information on the financial
performance and position so as to assess whether the business would be able to pay up for the goods and services provided as and when the payments
falls due.
iii. Managers
The managers are involved in the day-to-day activities of the business. They would like to have information on the financial position,
performance and changes in financial position so as to determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks and other financial institutions. They would
like to have information on the financial performance and position of the business to assess whether the business is profitable enough to pay
the interest on loans and whether it has enough resources to pay back the principal amount when it is due.
FINANCIAL ACCOUNTING 1
4 Introduction to Accounting
Non current assets are acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in business for a
period of more than one year.
Major examples include:
Land and buildings
Plant and machinery
Fixtures, furniture, fittings and equipment
Motor vehicles
Current assets are not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. Examples
include:
Stock of goods – for purpose of selling.
Trade debtors/accounts receivables – owe the business amounts as a resort of trading.
Other debtors – owe the firm amounts other than for trading.
Cash at bank.
Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which is expected to result to an economic outflow of amounts from the
firm. An example is when a business buys goods on credit, then the firm has a liability called creditor. The past event is the credit purchase and the
liability being the creditor the firm will pay cash to the creditor and therefore there is an out flow of cash from the business.
Non-current liabilities are expected to last or be paid after one year. This includes long-term loans from banks or other financial institutions.
Current liabilities last for a period of less than one year and therefore will be paid within one year. Major examples:
Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
Other creditors - owed amounts for services supplied to the firm
other than goods.
Bank overdraft - amounts advanced by the bank for a short-term
period.
Capital:
This is the residual amount on the owner‟s interest in the firm after deducting liabilities from the assets.
The Accounting equation can be expressed in a simple report called the Balance Sheet. The basic format is as follows:
Name
Balance sheet as at 31.12.
Sh Sh Sh Sh
Capital xx Non Current Assets
Land & Buildings xx
Non Current Liabilities Plant & Machinery xx
Loan xx Fixtures, furniture & fittings xx
Motor vehicles xx
FINANCIAL ACCOUNTING 1
6 Introduction to Accounting
Current liabilities xx
Overdraft xx Current Assets
Creditors xx xx Stocks xx
Debtor‟s xx
Capital and Liabilities Cash at bank xx
Cash in hand xx xx
xx Total assets xx
The above format of the balance sheet is the horizontal format however currently the practice is to present the Balance Sheet using the vertical
format which is shown below.
Name
Balance sheet as at 31.12.
Current Liabilities
Bank Overdraft xx
Creditors/trade payables xx (xx)
Net Current Assets xx
Net assets xx
Capital xx
Non Current Liabilities
Loan (from bank or other sources) xx
xx
Please pay attention to the format. The Non Current assets are listed in order of permanence as shown i.e. from Land and Buildings to motor
vehicles. The Current Assets are listed in order of liquidity i.e. which asset is far from being converted into cash. Example ,stock is not yet sold, (i.e.
FINANCIAL ACCOUNTING 1
8 Introduction to Accounting
not yet realised yet) then when it is sold we either get cash or a debtor (if sold on credit). When the debtor pays then the debtor may pay by cheque
(cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is payable on demand by the bank, then
followed by creditors.
Note that in the vertical format, current liabilities are deducted from current assets to give net current assets. This is added to Non Current assets,
which give us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
Example 1.1
B Kelly has a business that has been trading for some time. You are given the following information as at 31.12.2002
£
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
Stocks 8,500
Debtor 5,600
Cash a bank 1,500
Cash in hand 400
Creditors 2,500
Capital 30,800
Loan 5,000
B Kelly
Balance Sheet as at 31 December 2001
Current Assets
Stock 8,500
Debtors 5,600
Cash at bank 1,500
Cash in hand 400
16,000
Creditors (2,500)
Net Current Assets 13,500
Net Assets 35,800
FINANCIAL ACCOUNTING 1
10 Introduction to Accounting
Capital 30,800
Non-Current Liabilities
Loan 5,000
35,800
Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought motor vehicles of ₤3,000, premises of ₤7,000, stock of goods
₤2,000. He still owes ₤800 in respect of them. He had borrowed ₤4,000 from D Evans. After the events just described and before trading starts,
he had ₤300 cash in hand and ₤600 cash at bank.
Solution:
Assets: ₤ ₤
Motor Vehicle 3,000
Premises 7,000
Stock 2,000
Cash at bank 600
Cash in hand 300
12,900
Liabilities:
Creditors 800
Loan - D Evans 4,000 (4,800)
8,100
Capital 8,100
Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock of goods £9,900, Debtors £6,500, Cash at bank £12,900 and Cash
in hand £240.
FINANCIAL ACCOUNTING 1
12 Introduction to Accounting
You are to draw up a balance sheet as on 7 July 2002 after the above transactions have been completed.
First we need to look at the effect of the above transactions on the assets and liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because this is bought on credit the creditors increase by £1,540 also.
(b) Amount received from the debtor means that the level of debtors reduces and cash increases by £560.
(c) Extra fixtures bought by cheque, will increase the fixtures and reduce the cash at bank by £2,000.
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Current Assets
Stock 11,440
Debtors 6,000
Cash at bank 10,900
Cash at hand 800
29,140
FINANCIAL ACCOUNTING 1
14 Introduction to Accounting
Current Liabilities
Creditors (4,740)
Net Current Assets 24,400
Net Assets 41,800
Capital 41,800
From the illustration remember that any change in the items of the balance sheet will have a double effect on the accounting equation has a double
effect and therefore the equation will always balance.
Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors 15,800
Equipment 46,000
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been completed.
Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets and liabilities can be listed as follows.
Assets £ Liabilities £
Equipment 46,000 Creditors 15,800
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
148,120
FINANCIAL ACCOUNTING 1
16 Introduction to Accounting
(ii) To draw up the balance sheet, we consider the effect of the above transactions on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by £5,520 and the creditors will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by £2,280 and the balance at bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and also reduce the amount at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases the cash at bank and cash in hand by £3,360 and £240
respectively.
e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and the capital balances.
Capital 133,320
FINANCIAL ACCOUNTING 1
18 Introduction to Accounting
The Accounting equation forms the basis of double entry and therefore it should always be maintained. Any change in assets, liabilities or capital will
have a double effect such that assets will always be equal to liabilities plus capital. If the owners put in additional capital then this will increase the cash
at bank and the capital amount therefore the equation is still maintained.
Name Debit
Credit
Date Detail Folio Amount Date Detail Folio Amount
In this account the date will show the opening period of the asset ,liability or capital i.e. the balance brought forward. It will also show the date when a
transaction took place (i.e. either an asset was bought or liability incurred).
The detail column (also called the particulars column) shows the nature of the transaction and reference to the corresponding account. The Folio
Column for purposes of detailed recording shows the reference number of the corresponding account. The amount column shows the amount of the
asset, liability or capital.
The left side of the account is called the debit side and the right side is called the credit side. All assets are shown or recorded on the debit side while all
the liabilities and capital are recorded on the credit side. Each type of asset or liability must have its own account whereby all transactions affecting
them are recorded in this account. Therefore there should be an account for Premises, Plant and Machinery, Stock, Debtors, Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit entry. The transactions affecting these accounts
are posted in the account as debit entry and credit entry to complete the double entry.
Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500; Debtors £57,700;Cash at bank £72,800 and Cash in hand £400.
You are to draw up a balance sheet as on 7 December 2002 after the above transactions have been completed.
FINANCIAL ACCOUNTING 1
20 Introduction to Accounting
Answer:
Capital = Assets – Liabilities
Assets £ Liabilities £
Equipment 115,000 Creditors 39,500
Motor vehicle 62,900
Stock 61,500
Debtors 57,700
Cash at bank 72,800
Cash in hand 400
371,300
62,900 62,900
39,500 39,500
Equipment a/c
2002 £ 2002 £
1.12 Bal b\d 115,000
Creditors 13,800 7.12 Bal c\d 128,800
128,800 128,800
Stock a/c
2002 £ 2002 £
1.12 Bal b\d 61,500
Bank 5700 7.12 Bal c\d 67,200
67,200 67,200
Debtors a/c
2002 £ 2002 £
1.12 Bal b\d 57,700 Bank 8,400
Cash 600
Bank 570 7.12 Bal c\d 48,700
57,700 57,700
Capital
2002 £ 2002 £
1.12 Bal b\d 330800
7.12 Bal b\d 333300 Cash 2500
128,800 128,800
FINANCIAL ACCOUNTING 1
22 Introduction to Accounting
Creditors Of Equipment
2002 £ 2002 £
H Jump
Balance sheet as at 7 December 2002
Current Assets
Stock 61,200
Debtors 48,700
Cash at Bank 67,600
Cash in Hand 3,500
187,000
Current Liabilities
Creditors of equipment 13,800
Creditors 31,000 (45,400)
Net Current Assets 141,000
Net Assets 333,300
Capital 333,300
Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record the following transactions:
2002
June 1 Started business with £50,000 in the bank.
“ 2 Bought motor van paying by cheque £12,000.
“ 5 Bought Fixtures £4,000 on credit from Office Masters Ltd.
“ 8 Bought a van on credit from Motor Cars Ltd £8,000.
“ 12 Took £1,000 out of the bank and put it into the cash till.
“ 15 Bought Fixtures paying by cash £600.
“ 19 Paid Motor Cars Ltd by cheque £8000.
“ 21 A loan of £10,000 cash is received from J Marcus.
“ 25 Paid £8,000 of the cash in hand into the bank account.
“ 30 Bought more Fixtures paying by cheque £3,000.
58,000 58,000
Motor Van
2002 £ £
2/6 Bank 12,000
8/6 Super M 8,000 30/6 Bal c/f 20,000
20000 20000
Fixtures
2002 £ 2002 £
5/6 young 4,000
15/6 Cash 600
FINANCIAL ACCOUNTING 1
24 Introduction to Accounting
Cash in hand
2002 £ 2002 £
12/6 Cash 1,000 15/6 Cash 600
25/6 Bank 800
21/6 J. Marcus 10000 30/6 Bal c/f 2400
11000 11000
J. Marcus - Loaner
2002 £ 2002 £
30/6 c\f 10000 21/6 Cash 10000
Note that the difference between the debit side and the credit side is the balancing figure. Most assets will have a balance on the credit side and most
liabilities and capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:
M Crash
Balance Sheet as at 30th June 2002
£ £
Non Current Assets
Fixtures 7,600
Motor vehicles 20,000
27,600
Current Assets
Cash at bank 34,000
Cash in hand 2,400
36,400
Current Liabilities
Creditors – others (4,000)
Net Current Assets 32,400
Net Assets 60,000
Capital 50,000
Non Current Liabilities
Loan – J Jarvis 10,000
60,000
Let us now consider other transactions that take place in a business and the accounting entries to be made.
Sales:
This is the sell of goods that were bought by a firm (the goods must have been bought with the purpose of resale). Sales are divided into cash sales and
credit sales. When a cash sale is made, the following entries are to be made.
i. Debit cash either at bank or in hand.
ii. Credit sales account.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For cash purchases:
i. Debit purchases.
ii. Credit cash at bank/cash in hand
For credit purchases, we:
i. Debit purchases.
FINANCIAL ACCOUNTING 1
26 Introduction to Accounting
A new account is also opened for purchases where both cash and credit purchases are posted. NOTE: NO ENTRY IS MADE INTO THE
STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales). Such incomes include:
Rent
Bank interest
Discounts received.
When the firm receives cash, from these incomes, the following entries are made:
Debit cash in hand/at bank.
Credit income account.
Each type of income should have its own account e.g. rent income, interest income.
Incomes increase the value of capital and that is the reason why they are posted on the credit side of their respective accounts.
Expenses:
These are amounts paid out for services rendered other than those paid for purchases. Examples include:
Postage and stationery
Salaries and wages
Telephone bills
Motor vehicle running expenses.
Bank charges.
When a firm pays for an expense, we:
i. Debit the expense account.
ii. Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will be posted. Expenses decrease the value of capital and thus the
posting is made on the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and expenses.
INCOME
Credit Income
income
INCOMES/EXPENSES Debit Expense A/C
EXPENCES
GFSS
Credit cash book /bank/in hand
Returns Inwards: These are goods that have been returned by customers due to various reasons e.g.
i. They may be defective/damaged,
ii. Being of the wrong type .
iii. Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in relation to cash sales and cash is refunded to the customer the
following entries are made:
i. Debit returns – inwards
ii. Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer, the following entry is to be made.
i. Debit returns inwards.
ii. Credit debtors.
Returns Outwards: These are goods returned to suppliers/creditors. They may be for cash purchases or for credit purchases. For cash purchases a cash
refund given to the firm by the supplier,
i. Debit the cashbook (cash at bank/hand).
ii. Credit returns outwards.
FINANCIAL ACCOUNTING 1
28 Introduction to Accounting
i. Debit creditors.
ii. Credit returns outwards.
Cash
Credit cashbook.
Inwards Debit returns inwards
Credit
Credit debtors
Debit cash
Returns Cash
Credit
Example 1.8
You are to enter the following transactions, completing the double entry in the books for the month of May 2002.
2002
May 1 Started business with £2,000 in the bank.
“ 2 Purchased goods £175 on credit from M Rooks.
“ 3 Bought furniture and fittings £150 paying by cheque.
“ 5 Sold goods for cash £275.
“ 6 Bought goods on credit £114 from P Scot.
“ 10 Paid rent by cash £15.
“ 12 Bought stationery £27, paying in cash.
“ 18 Goods returned to M Rooks £23.
“ 21 Let off part of the premises receiving rent by cheque £5.
“ 23 Sold goods on credit to U Foot for £77.
“ 24 Bought a motor van paying by cheque £300.
“ 30 Paid the month‟s wages by cash £117.
FINANCIAL ACCOUNTING 1
30 Introduction to Accounting
Example
Bank a/c
2002 £ 2002 £
1/5 Capital 2,000 3/5Furn& fitting 150
24/5 Motor vehicle 300
21/5 Rent 5 31/5 Bal c/f 1,555
2,005 2,005
Capital a/c
31/5 Bal c/f 2,000 1/5 Bank 2,000
Purchases a/c
2002 £ 2002 £
2/5M Rooks 175
6/5 P Scot 114 31/5 Bal c/f 289
289 289
352 352
27 27
FINANCIAL ACCOUNTING 1
32 Introduction to Accounting
Drawings
The owner makes drawings from the firm in various ways:
Taking some of the other assets from the business e.g. motor vehicles or using part of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle or converting business premises into living quarters or not paying
into the business cash collected personally from the customers. When this happens we debit drawings and credit the relevant asset e.g. motor vehicles,
premises or some building or even debtors.
FINANCIAL ACCOUNTING 1
34 Introduction to Accounting
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the firm to pay the amount dues within the agreed time. It is an amount
deducted from the invoice price.
When a discount is given by the supplier then we debit creditor‟s account and credit discounts received e.g. A. Ltd sells some goods on credit to B Ltd.
₤1,000 under the terms of sale, B Ltd, will receive a discount of 5% if they pay the amount due within one month. B decides to take up the offer and
pays the amount within the given time. B will record the transaction as follows.
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customers to encourage prompt payment. The amounts deducted from
the sales invoice. In the previous example when A Ltd issued the discount and was taken up by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.
1,000 1,000
TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified as per the debits and credits. The purpose of the trial balance is to
show the accuracy of the double entries made and to facilitate the preparation of final accounts i.e. the trading, profit & loss account and a balance sheet.
The debits of the trial balance should be the same as the credits, if not then there is an error in one or more of the accounts.
Name
Trial balance as at 31 May 2002
Debit Credit
£ £
Rent – income 5
Debtor – U Foot 7
Motor vehicle 300
Bank 1555
Purchases 289
Wages 117
Capital 2000
Creditor – M Rooks 152
Furniture & Fittings 150
Sales 352
Cash in hand 72
Creditor – P Scot 114
Expenses – Rent 15
Expenses – Stationery 27
Returns Outwards 23
Drawings 44 .
2464 2464
FINANCIAL ACCOUNTING 1
36 Introduction to Accounting
From the trial balance please note that assets and expenses are on the debit side. Capital, liabilities and incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all the postings have been made in the relevant accounts.
Example 1.9
Write up the following transactions in the books of S Pink:
2003
March 1 Started business with cash £1,000.
“ 2 Bought goods on credit from A Cliks £296.
“ 3 Paid rent by cash £28.
“ 4 Paid £1,000 of the cash of the firm into a bank account.
“ 5 Sold goods on credit to J Simpson £54.
“ 7 Bought stationery £15 paying by cheque.
“ 11 Cash sales £49.
“ 14 Goods returned by us to A Cliks £17.
“ 17 Sold goods on credit to P Lutz £29.
“ 20 Paid for repairs to the building by cash £18.
“ 22 J Simpson returned goods to us £14.
“ 27 Paid A Cliks by cheque £279.
“ 28 Cash purchases £125.
“ 29 Bought a motor vehicle paying by cheque £395.
“ 30 Paid motor expenses in cash £15.
“ 31 Bought fixtures £120 on credit from R west.
Solutions
Capital a/c Cash in hand a/c
1,549 1,549
Purchases a/c
2003 £ 2003 £
2/3 A Hanson 296 31/3 Bal c/d 421 Creditors – A Cliks ac
28/3 Cash 125
2003 £ 2003 £
421 421 14/3 Returns out 17 2/3 Purchases 296
27/3 Bank 279
296 296
1,000 1,000
FINANCIAL ACCOUNTING 1
38 Introduction to Accounting
Stationery a/c
2003 £ 2003 £ Returns outwards a/c
7/3 Bank 15 31/3 Bal c/d 15
2003 £ 2003 £
31/3 Bal c/d 17 14/3 A Cliks 17
Returns - Inwards
Motor vehicle
2003 £ 2003 £ 2003 £ 2003 £
22/3 J Simpson 14 31/3 Bal c/d 14 29/3 Bank 395 31/3 Bal c/d 395
Fixtures
2003 £ 2003 £
31/3 A. Webster 120 31/3 Bal c/d 120
FINANCIAL ACCOUNTING 1
40 Introduction to Accounting
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
Example 1.10
The following transactions took place during the month of May:
2003
May 1 Started firm with capital in cash of £250.
“ 2 Bought goods on credit from the following persons: R Kelly £54; Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
“ 4 Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
“ 6 Paid rent by cash £12.
“ 9 C Blanes paid us his account by cheque £43.
“ 10 F Skin paid us £150 by cheque.
“ 12 We paid the following by cheque: J Role £25; R Kelley £54.
FINANCIAL ACCOUNTING 1
42 Introduction to Accounting
Answer
Capital Cash in Hand
2003 £ 2003 £ 2003 £ 2003 £
31/5 Bal 250 1/5 Cash 250 1/5 Capital 250 6/5 Rent 12
c/d
15/5 Carriage 23
. 31/5 Bal c/d 215
250 250
Purchases Sales
2003 £ 2003 £ 2003 £ 2003 £
2/5 R Kelly 54 31/5 Bal c/d 459 31/5 Bal c/f 348 4/5 C Blanes 43
Rent
19x6 £ 19x6 £
6/5 Cash 12 31/5 Bal c/d 30
31/5 Bank 18 .
30 30
Debit Credit
Capital - 250
Cash 215 -
Creditor – R Kelly - -
Creditor – P Combs - 130
Creditor – J Role - -
Creditor – D Mobile - 186
Creditor – L. Simms - 64
Debtor – C. Blanes - -
Purchases 459 -
FINANCIAL ACCOUNTING 1
44 Introduction to Accounting
Sales - 348
Debtor- B. Long 129 -
Debtor- F Skin 26 -
Bank 96 -
Carriage -
Rent 30 -
978 978
REINFORCEMENT QUESTIONS
Question One
Spark has been trading for a number of years as an electrical appliance retailer and repairer in premises which he rents at an annual rate of $1,500
payable in arrears. Balances appearing in his books at 1 January 19X1 were as follows:
$ $
Capital account 1,808
Motor van 1,200
Fixtures and fittings 806
Provision for depreciation on motor van (credit) 720
Provisions for depreciation on fixtures& fittings (credit) 250
Inventory at cost 366
Receivables for credit sales:
Brown 160
Blue 40
Stripe 20
220
Cash at bank 672
Cash in hand 5
Payables for supplies:
Live 143
Negative 80
Earth 73
296
Amount owing for electricity 45
Local taxes paid in advance 100
Although Sparks has three credit customers the majority of his sales and services are for cash, out of which he pays various expenses before banking the
balance.
The following transactions took place during the first four months of 19X1
January February March April
$ $ $ $
Suppliers‟ invoices:
Live 468 570 390 602
FINANCIAL ACCOUNTING 1
46 Introduction to Accounting
Negative - 87 103 64
Earth 692 - 187 -
Capital introduced 500
Bankings of cash (from cash sales) 908 940 766 1,031
Expenditure out of cash sales before banking:
Withdrawals on account 130 120 160 150
Stationery 12 14 26 21
Travelling 6 10 11 13
Petrol and van repairs 19 22 37 26
Sundry expenses 5 4 7 3
Postage 12 10 15 19
Cleaner‟s wages 60 60 65 75
Goods invoiced to credit customers:
Brown 66 22 10 12
120 140 130 180
Blue
Stripe 44 38 20 48
Cheque payments (other than those to suppliers):
Telephone 40 49 59 66
Electricity 62 47 20 106
Local taxes - - 220 -
Motor van (1 February 19X1) - 800 - -
Unbanked at the end of April - - - 12
Spark pays for goods by cheque one month after receipt of invoice, and receives a settlement discount of 15% from each supplier.
Credit customers also pay by cheque one month after receipt of invoice, and are given a settlement discount of 10% of the invoice price.
Required:
Write up the ledger accounts of Spark for the four months to 30 April 19X1, and extract a list of account balances after balancing off the accounts.
Question Two
Mary
Balance Sheet as at 31 December 2000
During the year to 31 December 2001 the following total transactions occurred:
FINANCIAL ACCOUNTING 1
48 Introduction to Accounting
Required:
Question Three
a) Explain the nature of accounting and the accounting equation (8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following information
(12 marks)
Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:
£
Sales 47,600.00
Purchases 22,850.00
Office expenses 1,900.00
Insurance 700.00
Wages 7,900.00
Rates 2,800.00
Heating and Lighting 1,200.00
Telephone 650.00
Discounts allowed 1,150.00
Opening stock 500.00
Returns inwards 200.00
Returns outwards 150.00
Premises 40,000.00
Plant and Machinery 5,000.00
Motor Vehicles 12,000.00
Debtors 12,500.00
Bank balance 7,800.00
Creditors 3,400.00
Loan-long term loan 10,000.00
Capital 60,000.00
Drawings for the year 4,000.00
Closing stock 550.00
Required:
Construct a trial balance, from the above list of balances.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
50 Final Accounts
LESSON TWO
FINAL ACCOUNTS
Name
Trading Account for the year ended 31 Dec.
₤ ₤ ₤
Sales x
Less: Returns Inwards (x)
x
Example: 2.1
From the following details draw up the trading account of Springs for the year ended 31 December 2002, which was his first year in business.
₤
Carriage inwards 6,700
Returns outwards 4,950
Returns inwards 8,900
Sales 387,420
Purchases 333,330
Stock of goods: 31 December 19x7 74,890
FINANCIAL ACCOUNTING 1
52 Final Accounts
Springs
Trading Account for the year ended 31 Dec 2002
£ £
Sales 387,420
Less: Returns Inwards 8,900
378,520
Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the trading account of R Sings for that year.
£
Stocks: 1 April 2002 16,523
Returns inwards 1,372
Returns outwards 2,896
Purchases 53,397
Carriage inwards 1,122
Sales 94,600
Stocks: 31 March 2003 14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
₤ ₤ ₤
Sales 94,600
Less: Returns Inwards (1,372)
93,228
Less: Cost of sales
Opening Stock 16,523
Purchases 53,397
Add: Carriage Inwards 1,122
54,519
Less: Returns Outwards 2,896 51,623
Cost of goods available for sale 68,146
Less: Closing stock 18,504 (49,642)
Gross Profit 43,586
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
£ £ £
Sales x
Less: Returns Inwards x
x
FINANCIAL ACCOUNTING 1
54 Final Accounts
Discount received x
Rent received x
Interest received x
Other incomes x
x
Less: Expenses
Carriage Outwards x
Discounts allowed x
Postage & stationary x
Salaries & wages x
Rent paid x
Insurance & rates x
Bank charges x
Other expenses x (x)
Net profit/ (loss) x/(x)
Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss account for the year ended 30 September 2002, and a balance sheet
as at that date.
Dr Cr
£ £
Stock 1 October 19x8 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns inwards 2,050
Returns outwards 3,220
Purchases 118,740
Sales 186,000
Salaries and wages 38,620
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting and heating expenses 1,660
General expenses 3,140
Premises 50,000
Motor vehicles 18,000
Fixtures and fittings 3,500
Debtors 38,960
Creditors 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360
332,890 332,890
FINANCIAL ACCOUNTING 1
56 Final Accounts
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
£ £ £
Sales 186,000
Less: Returns Inwards (2,050)
183,950
Less Expenses
Salaries & wages 38,620
Carriage outwards 2,000
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting & heating 1,660
General expenses 3,140 (58,040)
Net Profit 13,070
Name
Balance sheet as at 31/Dec/19xx
£ £ £
Non Current Assets
Land & Buildings x
Plant & Machinery x
Fixtures, Furniture & Fittings x
Motor vehicles x
x
Current Assets
Stock/inventories x
Debtors – trade x
Debtors – others x
Cash at bank x
Cash at hand x
x
Current Liabilities
Bank overdraft x
Creditors – trade x
Creditors – others x (x)
Net current assets x
Net Assets x
Capital x
Add: Net profit x
x
Less: Drawings (x)
x
FINANCIAL ACCOUNTING 1
58 Final Accounts
P Boones
Balance Sheet as at 30 Sept 2002
£ £
Non Current Assets
Premises 50,000
Fixtures & fittings 3,500
Motor vehicles 18,000
71,500
Current Assets
Stock 29,460
Debtors 38,960
Cash at bank 4,820
73,240
Current Liabilities
Creditors (17,310)
Net Current Assets 55,930
Net Assets 127,430
Capital 126,360
Add: Net Profit 13,070
139,430
Less: Drawings (12,000)
127,430
`
FINANCIAL ACCOUNTING 1
60 Final Accounts
This shows the evidence transactions. They are collected, filed and posted in the books of prime entry. Example, if a firm sells goods on credit, then
an invoice is raised. The source documents as shown in the above include:
FINANCIAL ACCOUNTING 1
62 Final Accounts
Sales invoice
Purchases invoice
Credit note
Debit note
Receipts, cheques and petty cash vouchers
Other correspondences.
The purpose of the credit note is to inform the debtor or customer that the debtor‟s account with the firm has been credited i.e. the amount due to
the firm has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors. From the context we can assume that all
credit notes are issued when goods are returned.
(iv) Debit note
This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It includes the following items:
i. Name and address of the firm
ii. Name and address of the creditor
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or cancelled.
The The
Firm Credit sales (sales invoice)
Debtor
Returns inwards (credit note)
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they make payments in the form of cash or cheques. It shows:
Cheques
FINANCIAL ACCOUNTING 1
64 Final Accounts
When a firm opens a current account with the bank, a chequebook containing cheques issued. The cheques allow the firm to make payments against
the account with the bank. When a firm issues a cheque to its creditors for payments, it authorizes the bank to honour payments against the firm‟s
account with the bank. The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm‟s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
It is also called a Sales Day Book. It records all the sales invoices issued by the firm during a particular financial period. The format is as follows (with
simple records of invoice).
Total 700.00
The individual entries in the sales journal are posted to the debit side of the debtor‟s accounts in the sales ledger and the total is posted on the credit
side of the sales account in the general ledger.
T Binus
19x8 £ 19x8
3/3 Sales 350
FINANCIAL ACCOUNTING 1
66 Final Accounts
L Thompson
19x8 £ 19x8 £
3/3 Sales 150
Example 2.4
You are to enter up the sales journal from the following details. Post the items to the relevant accounts in the sales ledger and then show the transfer to
the sales account in the general ledger.
2003
Mar 1 Credit sales to J Gordon £1,870
“ 3 Credit sales to G Abrahams £1,660
“ 6 Credit sales to V White £120
“ 10 Credit sales to J Gordon £550
“ 17 Credit sales to F Williams £2,890
“ 19 Credit sales to U Richards £660
“ 27 Credit sales to V Wood £280
“ 31 Credit sales to L Simes £780
Answer
8,810.00
Sales Ledger
J Gordon U Richards
2003 £ 2003 £ 2003 £ 2003 £
1/3 1570 19/3 Sales 660
10/3 550
G Abrahams V Wood
2003 £ 2003 £ 2003 £ 2003 £
3/3 Sales 1,660 27/3 Sales 280
U White L Simes
FINANCIAL ACCOUNTING 1
68 Final Accounts
Purchases Journal
Purchases journal is also called a purchases day-book. It records all the purchase invoices received by the firm during a particular financial period. It has
the following format (including records of invoices).
TOTAL 750
The individual entries in the purchases journal are posted to the credit side of the creditor‟s accounts in the purchases ledger and the total is posted to
the debit side of purchases account of the general ledger. This is shown below:
L Smailes
19x6 £ 19x6 £
2/5 Purchases 250
TOTAL £53
Individual entries in a return inwards journal are posted to the credit of the debtors accounts in the sales ledger and the total is posted to the debit side
of the return-inwards account of the general ledger.
FINANCIAL ACCOUNTING 1
70 Final Accounts
TOTAL 35
Individual entries are posted on the debit side of the creditors account in the purchases ledger and on the total to credit side of the returns outwards
account in the general ledger.
M. Hyatt a/c
£ £
3/5 Returns out 12
FINANCIAL ACCOUNTING 1
72 Final Accounts
T. Bills a/c
£ £
4/5 Returns Out 19
The following example 2.5 shows how the four journals are used.
19x5
July 1 Credit purchases from: K Hill £3800; M Norman £500; N Senior £106.
“ 3 Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356.
5 Credit purchases from: R Morton £200; J Cook £180; D Edwards £410; C Davies £66.
“ 8 Credit sales to: A Green £307; H George £250; J Ferguson £185.
“ 12 Returns outwards to: M Norman £30; N Senior £16.
“ 14 Returns inwards from: E Phillips £18; F Thompson £22.
“ 20 Credit sales to: E Phillips £188; F Powell £310; E Lee £420.
“ 24 Credit purchases from: Ferguson £550; K Ennevor £900.
“ 31 Returns inwards from: E Phillips £27; E. Rigby £30.
“ 31 Returns outwards to: J Cook £13; C Davies £11.
SALES JOURNAL
TOTAL 2,772
Sales Ledger
E Rigby E Phillips
FINANCIAL ACCOUNTING 1
74 Final Accounts
F. Thompson
J. Ferguson
19x5 £ 19x5 £ 19x5 £ 19x5 £
3/7 Sales 356 14/7 Returns 22 8/7 Sales 185
in
Green F. Powell
19x5 £ 19x5 £ 19x5 £ 19x5 £
8/7 Sales 307 20/7 Sales 310
H George E Lee
19x5 19x5 £ 19x5 £ 19x5 £
8/7 Sales 250 20/7 Sales 420
PURCHASES JOURNAL
Total 3,292
Purchases Ledger
N. Senior
1995 £ 1995 £
12/7 Returns out 16 1/7 Purchases 22
M. Norman
1995 £ 1995 £
30/7 Returns out 30 1/7 Purchases 500
J. Cook
1995 £ 1995 £
31/7 Returns out 13 5/7 Purchases 180
C. Davies
1995 £ 1995 £
31/7 Returns out 11 5/7 Purchases 60
K. Hill
1995 £ 1995 £
1/7 Purchases 380
R. Morton
1995 £ 1995 £
5/7 Purchases 200
FINANCIAL ACCOUNTING 1
76 Final Accounts
D. Edwards
1995 £ 1995 £
5/7 Purchases 410
C. Ferguson
1995 £ 1995 £
27/7 Purchases 550
K. Ennevor
1995 £ 1995 £
24/7 Purchases 900
12 July M. Norman 30
12 July N. Senior 16
31 July J. Cook 13
31 July C. Davies 11
70
General Ledger
Sales a/c
1995 £ 1995 £
31/7 Sundry debtors 2772
Purchases a/c
1995 £ 1995 £
31/7 Sundry creditors 3292
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of income) and all the payments (to creditors or
suppliers and other expenses) for a particular financial period. The cashbook will also show us the cash at bank and cash in hand position of the firm.
i. Cash in hand cashbook, which records the cash transactions in the firm or business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of the general ledger and records the source documents (receipts and
cheques). The cash at bank cashbook and cash in hand cashbook are combined together to get a two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
FINANCIAL ACCOUNTING 1
78 Final Accounts
Additional columns for discounts allowed and discounts received can be included with the cash at bank columns to get a 3 – column cashbook. The
format is as follows:
Date Details Discount Cash Bank Date Details Discounts Bank Cash
Allowed (£) (£) Received £) (£)
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger balances and the discounts allowed and discounts
received columns will be added and the totals posted to the respective discount accounts. The discount allowed total will be posted to the debit side of
the discount allowed account in the general ledger and the total of the discount received will be posted to the credit side of the discount-received
account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the firm has some cash at the bank and a credit balance means that the
account at the bank is overdrawn. (the firm owes the bank some money).
Example 2.7
Write up a two-column cashbook from the following details, and balance off as at the end of the month:
2003
Cash Book
Cash Bank Cash Bank
Capital 1000
F Lake (loan) 5000
Sales 980
N Miller 620
Sales 530
G Moores 650
Cash C
Sales
Bank C
Cash Book
Cash Bank Cash Bank
Capital 1000 Rent 100
F. Lake (Loan) 5000 B McKenzie 650
Sales 980 B Burton 220
FINANCIAL ACCOUNTING 1
80 Final Accounts
19x8
Mar 1 Balances brought forward: Cash £230; Bank £4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton £140; E Taylor £220; R Harris £800.
“ 4 Paid rent by cheque £120.
“ 6 J Cotton lent us £1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per cent cash discount: N Black £360; P Towers £480; C
Rowse £300.
“ 10 Paid motor expenses in cash £44.
“ 12 H Hankins pays his account of £77, by cheque £74, deducting £3 cash discount.
“ 15 Paid wages in cash £160.
“ 18 The following paid their accounts by cheque, in each case deducting 5 per cent cash discount: C Winston £260; R Wilson & Son
£340; H Winter £460.
“ 21 Cash withdrawn from the bank £350 for business use.
“ 24 Cash Drawings £120.
“ 25 Paid T Briers his account of £140, by cash £133, having deducted £7 cash discount.
“ 29 Bought fixtures paying by cheque £650.
“ 31 Received commission by cheque £88.
Answer
Cash Book
Disct Cash Bank Disct Cash Bank
Bank
Bal b/d 230 4756 Rent 120
R Burton 7 133 N Black 9 351
E Taylor 11 209 P Towers 12 468
R Harris 15 285 C Rowse 20 780
J Cotton: loan 1000 Motor expenses 44
H Hankins 3 74 Wages 160
C Winston 13 247 Cash 350
R Wison & Son 17 323 Drawings 120
H Winter 23 437 T Briers 7 133
Bank 350 Fixtures 650
Commission 88 Balances c/d 123 4833
89 580 7552 48 580 7552
Discounts Received
3/1 Sundry Creditors 48
Discounts Allowed
3/1 Sundry Debtors 89
FINANCIAL ACCOUNTING 1
82 Final Accounts
Cleaning expenses.
The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand. The totals of the expenses are posted to
the debit side of the expense accounts. If a firm operates another cashbook in addition to the petty cash book, then the totals of the expenses will also
be posted on the credit side of the cash in hand cashbook.
£
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000
Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float). I n the following week, the following payments are made:
£
1st March – bought stamps for 80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
3rd March – bought fuel 150
3rd March – cleaning wages 300
4 March – bought stamps
th 200
4th March – paid L. Thompson (creditor) 400
5th March – fuel costs 150
On the 5th of March the cashier requested for a refund of the cash spent and this amount was reimbursed back.
Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the relevant expense accounts, as they would
appear on the General Ledger.
FINANCIAL ACCOUNTING 1
84 Final Accounts
Answer
GENERAL JOURNAL
FINANCIAL ACCOUNTING 1
86 Final Accounts
Example 2.9
You are to show the journal entries necessary to record the following items:
2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
2003 May 8 Furniture bought by us for £490 was returned to the supplier Wood
Offices, as it was unsuitable. Full allowance will be given us.
2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and we received
£39 in full settlement of the debt.
2003 May 14 we take £45 goods out of the business stock without paying for them.
2003 May 28 Some time ago we paid an insurance bill thinking that it was all in respect
of the business. We now discover that £76 of the amount paid was in fact insurance of our private house.
2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.
a. Answer
GENERAL JOURNAL
FINANCIAL ACCOUNTING 1
88 Final Accounts
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability, incomes and expenses and capital.
The ledger accounts can also be classified as follows:
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
REAL NORMAL
ACCOUNTS a/cs
DEBTORS CREDITORS
(for goods) (For goods)
Other
Non-current Liabilities
assets
Other
Inventories/ Assets
Stocks
Income
Expenses
Capital
FINANCIAL ACCOUNTING 1
90 Final Accounts
REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital of £5,000.00 with which he opened a bank account for his
business.
May 1 Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
May 2 Purchased goods on credit from Abel £650.00
May 4 Sold goods on credit to Bruce £700.00
May 9 Purchased goods on credit from Green £300.00
May 11 Sold goods on credit to Hill £580.00
May 13 Cash sales paid into bank account £200.00
May 16 Received cheque from Bruce in settlement of his account
May 17 Purchased goods on credit from Kay £800.00
May 18 Sold goods on credit to Nailor £360.00
May 19 Sent Cheque to Abel in settlement of his account
May 20 Paid rent by cheque £200.00
May 21 Paid delivery expenses by cheque £50.00
May 24 Received from Hill £200.00 on account
May 30 Drew cheque for personal expenses £200.00 and assistant wages £320.00
May 31 Settled the account of Green.
Required
a) Record the transactions in the books of prime entry.
b) Post the entries in the ledger accounts
c) Balance the ledger accounts where necessary
d) Extract a trial balance as at 31 May 2000.
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages bookshop.
Endpages Bookshop
FINANCIAL ACCOUNTING 1
92 Final Accounts
Dr Cr Required
£ £
Prepare a Trading and profit and loss account for
the year ended 31 December 2002 and a balance
Sales 151,500.00
sheet as at that date.
Purchases 103,500.00
(20 marks)
Salaries and wages 18,700.00
Office expenses 2,500.00
Insurance 1,100.00
Electricity 600.00
Stationery 2,400.00
Advertising 3,500.00
Telephone 800.00
Rates 3,000.00
Discount allowed 100.00
Discount received 200.00
Rent received 2,000.00
Returns inwards 1,500.00
Returns outwards 3,500.00
Stock at 01 Jan 2001 46,000.00
Premises 80,000.00
Stock as at 31 Dec 2001 41,000.00
Fixtures and fittings 5,000.00
Debtors and Creditors 4,800.00 7,500.00
Cash in Hand 200.00
Cash in bank 12,000.00
Capital 11,000.00
Drawings 14,000.00
Stock as at 31 Dec 2001
________ 41,000.00
328,700.00 328,700.00
QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of final accounts for the year ended 31 March 2002.
Dr Cr
£ £
Stock 1 April 2001 1,816,000
Sales 9,234,000
Purchases 6,918,500
Carriage inwards 42,000
Carriage outwards 157,000
Returns outwards 64,000
Wages and salaries 1,024,000
Rent and rates 301,500
Communication expenses 62,400
Commissions payable 21,600
Insurance 40,500
Sundry expenses 31,800
Buildings 2,000,000
Debtors 1,432,000
Creditors 816,000
Fixtures 285,000
Cash at bank 297,000
Cash in hand 11,500
Drawings 762,000
Capital 5,088,800
152,028 152,028
FINANCIAL ACCOUNTING 1
94 Final Accounts
QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to draft the trading and profit and loss account for the year to end 30
September 2002 and a balance sheet as at that date.
Dr Cr
£ £
Capital 3,095,500
Drawings 842,000
Cash at bank 311,500
Cash in hand 29,500
Debtors 1,230,000
Creditors 937,000
Stock 30 September 2001 2,391,000
Motor van 410,000
Office equipment 625,000
Sales 1,309,000
Purchases 9,210,000
Returns inwards 55,000
Carriage inwards 21,500
Returns outwards 30,700
Carriage outwards 30,900
Motor expenses 163,000
Rent 297,000
Telephone charges 40,500
Wages and salaries 1,281,000
Insurance 49,200
Office expenses 137,700
Sundry expenses
28,400
17,153,200 17,153,200
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
QUESTION ONE
The books of Mr T, a trader in tea showed the following balances as at 31 March 1998:
Shs.
Opening stock of tea 100,000
Purchases – Tea 400,000
Salaries paid 80,000
Buildings 95,000
Cash in hand 2,000
Cash at bank 135,000
Rent, rates and council taxes 15,000
Insurance premium paid 3,000
Miscellaneous receipts 10,000
Sales 720,000
Discounts allowed 4,750
Bad debts 3,250
Building repairs 2,900
Miscellaneous expenses 8,700
Advertisement 20,000
Commission to sales manager 32,400
Furniture and fittings 35,000
Air conditioners 30,000
Sundry debtors 100,000
Sundry creditors 80,000
Loan on mortgage 70,000
Interest paid on the above 3,000
FINANCIAL ACCOUNTING 1
96 Final Accounts
Required:
Prepare a trading, profit and loss account for the year ended 31 st March 1998 and a Balance Sheet as at that date.
QUESTION TWO
Hall Ltd., which makes up its accounts to 30th June each year, has a fleet of motor lorries. Annual depreciation on motor lorries is calculated at a rate of
25% on the reducing balances, with a full year‟s depreciation being made in the year of purchase, but no charge in the year of sale. An extract from the
company‟s balance sheet as on 30th June 1997 showed the following:
Shs
Motor Lorries at cost: 164,900
Less provision for depreciation: 93,382
Net book Value: 71,518
During the year ended 30th June 1998 purchases and sales of lorries were as follows:
Required:
Write up the following accounts in the books of the company for the year ended 30 th June 1998:
FINANCIAL ACCOUNTING 1
98 Final Accounts
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader, at 31 st December 1997:
Shs Shs.
Drawings/Capital 2,148 20,271
Debtors/Creditors 7,689 5,462
Purchases/Sales 62,101 81,742
Rent and Rates 880
Light and heat 246
Salaries and wages 8,268
Bad debts 247
Provision for bad debts 326
Stock in trade 31st Dec 1996 9,274
Insurance 172
General Expenses 933
Bank balances 1,582
Motor van at cost/Provision for depreciation 8,000 3,6000
Proceeds on sale of van 250
Motor expenses 861
Freehold premises at cost 15,000
Rent received 750
Provision for depreciation on buildings 5,000
117,401 117,401
Required:
A Trading Profit and Loss account for the year ended 31st December 1997 and a Balance Sheet as at date using vertical format.
QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it makes quarterly payments as follows:
The rental agreement began on 1st August 19X4, and the first six quarterly bills were as follows
Bills and dates received Rental (Shs) Cost of copies (shs) Total cost (Shs)
1 August 19X4 2,100 0 2,100
1 November 19X4 2,100 1,500 3,600
1 February 19X5 2,100 1,400 3,500
1 May 19X5 2,100 1,800 3,900
1 August 19X5 2,700 1,650 4,350
1 November 19X5 2,700 1,950 4,650
Required:
Given that Batley Printing shop ends its accounting year on 31 August,
Calculate the charge for photocopying expenses for the year to 31 August, 19X5 and the amount of prepayments and / or accrued charges as at that
date.
QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention looks forwards.”
Required:
a) Explain clearly what is meant by:
FINANCIAL ACCOUNTING 1
100 Final Accounts
b) Does traditional financial accounting, using the historical cost convention, make the going concern convention unnecessary? Explain your
answer fully.
c) Which do you think a shareholder is likely to find more useful – a report on the past or an estimate of the future? Why?
LESSON THREE
ACCOUNTING THEORY
(a) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to
promote their worldwide acceptance; and
(b) To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation
of financial statements.
The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which co-ordinates the Accounting profession
worldwide. Most accounting bodies of countries are members of IFAC.
The IASC develops IAS‟s through an international process that involves the worldwide accountancy profession, the preparers, users of financial
statements and national standard setting bodies and other interested parties.
The IASB sets up a steering committee to develop a statement of principles, an Exposure Draft and ultimately an Accounting Standards once a new
topic is suggested. The process includes:
Identifying and reviewing of all the issues associated with the topic,
Studying national and regional accounting requirements and practice, consultation with the member bodies‟ standard setting bodies and other
interested groups,
Public Exposure of the draft Accounting Standard,
Evaluation by the steering committee and the board of the comments received on exposure drafts.
FINANCIAL ACCOUNTING 1
102 Accounting Theory
IAS 2 Inventories
Previously new standards were called International Accounting Standards but from 2003 any new standards will be called International financial
Reporting Standards. However in the current practice is to refer to all standards as International Financial Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with Kenya Accounting Standards (IASs), which were developed and
published by ICPAK (Institute of Certified Public Accountants of Kenya). This were later dropped and International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:
a) Use of IASs adds credibility to the financial statements as they can be compared with others globally.
b) Facilitates communication within an enterprise that has foreign branches or subsidiaries due to harmonized reporting by the separate entities
in the group.
c) Adds value to the financial statements incase an entity is sourcing for foreign capital.
d) Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no
intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going to be) liquidated or if it has ceased (or
is about to cease) trading. The directors of a company must also disclose any significant doubts about the company‟s future if and when they arise.
The main significance of the going concern concept is that the assets of the business should not be valued at their „break-up‟ value, which is the
amount that they would sell for it they were sold off piecemeal and the business were thus broken up.
ii) The accruals concept (or matching concept): states that revenue and costs must be recognized as they are earned or incurred, not as money is
received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in
the profit and loss account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200) earned from the sale of 20 units against the cost (£100) of acquiring
them.
If, however, the firm had only sold eighteen units, it would have been incorrect to charge profit and loss account with the cost of twenty units;
there is still two units in stock. If the firm intends to sell them later, it is likely to make a profit on the sale. Therefore, only the purchase cost of
eighteen units (£90) should be matched with the sales revenue, leaving a profit of £90.
FINANCIAL ACCOUNTING 1
104 Accounting Theory
Assets
190
Liabilities
Creditors 100
90
If, however the firm had decided to give up selling units, then the going concern concept would no longer apply and the value of the two units in
the balance sheet would be a break-up valuation rather than cost. Similarly, if the two unsold units were now unlikely to be sold at more than their
cost of £5 each (say, because of damage or a fall in demand) then they should be recorded on the balance sheet at their net realizable value (i.e. the
likely eventual sales price less any expenses incurred to make them saleable, e.g. paint) rather than cost. This shows the application of the prudence
concept. (See below).
In this example, the concepts of going concern and matching are linked. Because the business is assumed to be a going concern it is possible to
carry forward the cost of the unsold units as a charge against profits of the next period.
Essentially, the accruals concept states that, in computing profit, revenue earned must be matched against the expenditure incurred in earning it.
iii) The Prudence Concept: The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected
should be the one that gives the most cautious presentation of the business‟s financial position or results.
Therefore, revenue and profits are not anticipated but are recognized by inclusion in the profit and loss account only when realized in the
form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty: provision is made for all
liabilities (expenses and losses) whether the amount of these is known with certainty or is best estimate in the light of the information available.
Assets and profits should not be overstated, but a balance must be achieved to prevent the material overstatement of liabilities or losses.
The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated and taken into account immediately. If a business
purchases stock for £1,200 but because of a sudden slump in the market only £900 is likely to be realized when the stock is sold the prudence
concept dictates that the stock should be valued at £900. It is not enough to wait until the stock is sold, and then recognize the £300 loss; it must
be recognized as soon as it is foreseen.
A profit can be considered to be a realized profit when it is in the form of:
Cash
Another asset that has a reasonably certain cash value. This includes amounts owing from debtors, provided that there is a reasonable certainty
that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth £100,000 during the year to 31 December. At 31 December there are debts
outstanding of £15,000. Of these, the company is now doubtful whether £6,000 will ever be paid.
The company should make a provision for doubtful debts of £6,000. Sales for 20x5 will be shown in the profit and loss account at their full value
of £100,000, but the provision for doubtful debts would be a charge of £6,000. Because there is some uncertainty that the sales will be realized in
the form of cash, the prudence concept dictates that the £6,000 should not be included in the profit for the year.
iv) The consistency concept: The consistency concept states that in preparing accounts consistency should be observed in two respects.
a) Similar items within a single set of accounts should be given similar accounting treatment.
b) The same treatment should be applied from one period to another in accounting for similar items. This enables valid comparisons to be
made from one period to the next.
v) The entity concept: The concept is that accountants regard a business as a separate entity, distinct from its owners or managers. The concept
applies whether the business is a limited company (and so recognized in law as a separate entity) or a sole proprietorship or partnership (in which
case the business is not separately recognized by the law.
vi) The money measurement concept: The money measurement concept states that accounts will only deal with those items to which a monetary
value can be attributed.
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106 Accounting Theory
For example, in the balance sheet of a business, monetary values can be attributed to such assets as machinery (e.g. the original cost of the machinery;
or the amount it would cost to replace the machinery) and stocks of goods (e.g. the original cost of goods, or, theoretically, the price at which the
goods are likely to be sold).
The monetary measurement concept introduces limitations to the subject matter of accounts. A business may have intangible assets such as the
flair of a good manager or the loyalty of its workforce. These may be important enough to give it a clear superiority over an otherwise identical
business, but because they cannot be evaluated in monetary terms they do not appear anywhere in the accounts.
vii) The separate valuation principle: The separate valuation principle states that, in determining the amount to be attributed to an asset or liability
in the balance sheet, each component item of the asset or liability must be determined separately.
These separate valuations must then be aggregated to arrive at the balance sheet figure. For example, if a company‟s stock comprises 50 separate
items, a valuation must (in theory) be arrived at for each item separately; the 50 figures must then be aggregated and the total is the stock figure
which should appear in the balance sheet.
viii) The materiality concept: An item is considered material if it‟s omission or misstatement will affect the decision making process of the users.
Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a
set of accounts.
An error that is too trivial to affect anyone‟s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to
assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute measure of materiality. It is common to apply a
convenient rule of thumb (for example to define material items as those with a value greater than 5% of the net profit disclosed by the accounts).
But some items disclosed in accounts are regarded as particularly sensitive and even a very small misstatement of such an item would be regarded
as a material error. An example in the accounts of a limited company might be the amount of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment in the accounts. For example, the profit and loss account of a
business will show the expenses incurred by he business grouped under suitable captions (heating and lighting expenses, rent and rates expenses
etc); but in the case of very small expenses it may be appropriate to lump them together under a caption such as „sundry expenses‟, because a
more detailed breakdown would be inappropriate for such immaterial amounts.
Example:
a) If a balance sheet shows fixed assets of £2 million and stocks of £30,000 an error of £20,000 in the depreciation calculations might not be
regarded as material, whereas an error of £20,000 in the stock valuation probably would be. In other words, the total of which the erroneous item
forms part must be considered.
b) If a business has a bank loan of £50,000 balance and a £55,000 balance on bank deposit account, it might well be regarded as a material
misstatement if these two amounts were displayed on the balance sheet as „cash at bank £5,000‟. In other words, incorrect presentation may
amount to material misstatement even if there is no monetary error.
ix) The historical cost convention: A basic principle of accounting (some writers include it in the list of fundamental accounting concepts) is that
resources are normally stated in accounts at historical cost, i.e. at the amount that the business paid to acquire them. An important advantage of
this procedure is that the objectivity of accounts is maximized: there is usually objective, documentary evidence to prove the amount paid to
purchase an asset or pay an expense. Historical cost means transactions are recorded at the cost when they occurred.
In general, accountants prefer to deal with costs, rather than with „values‟. This is because valuations tend to be subjective and to vary according to
what the valuation is for. For example, suppose that a company acquires a machine to manufacture its products. The machine has an expected useful
life of four years. At the end of two years the company is preparing a balance sheet and has decided what monetary amount to attribute to the asset.
FINANCIAL ACCOUNTING 1
108 Accounting Theory
x) Objectivity (neutrality):An accountant must show objectivity in his work. This means he should try to strip his answers of any personal
opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this should be that any number of
accountants will give the same answer independently of each other. Objectivity means that accountants must be free from bias. They must adopt a
neutral stance when analysing accounting data. In practice objectivity is difficult. Two accountants faced with the same accounting data may come
to different conclusions as to the correct treatment. It was to combat subjectivity that accounting standards were developed.
xi) The realization concept: Realization: Revenue and profits are recognized when realized. The concept states that revenue and profits are not
anticipated but are recognized by inclusion in the income statement only when realized in the form of either cash or of other assets the ultimate
cash realization of which can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double entry bookkeeping.
xiii) Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and
economic reality and not merely their legal form e.g. a non current asset on Hire purchase although is not legally owned by the enterprise until it is
fully paid for, it is reflected in the accounts as an asset and depreciation provided for in the normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be „realized‟ and so „recognized‟ in the trading, profit and loss account when:
a) The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain.
b) The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the
job is well under way but not yet completed by the end of an accounting period).
c) The critical event in the sale transaction has occurred. The critical event is the event after which:
i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.
The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the trading, profit and loss account, before it
is reasonably certain to „happen‟.
Required
Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be recognized at the following stages of a sale.
(a) Goods have been acquired by the business, which it confidently expects to resell very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer‟s cheque in payment for the goods has been cleared by the bank.
Answer
(a) A sale must never be recognized before a customer has even ordered the goods. There is no certainty about the value of the sale, nor when it will
take place, even if it is virtually certain that goods will be sold.
(b) A sale must never be recognized when the customer places an order. Even though the order will be for a specific quantity of goods at a specific
price, it is not yet certain that the sale transaction will go through. The customer may cancel an order, the supplier might be unable to deliver the
goods as ordered or it may be decided that the customer is not a good credit risk.
(c) A sale will be recognized when delivery of the goods is made only when:
i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a delivery note).
(d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. There is then a legally enforceable debt payable on
specified terms, for a completed sale transaction.
(e) The critical event for a cash sale is when delivery takes place and when cash is received, both take place at the same time. It would be too cautious
or „prudent‟ to await cash payment for a credit sale transaction before recognizing the sale, unless the customer is a high credit risk and there is a
serious doubt about his ability or intention to pay.
(f) It would again be over-cautious to wait for clearance of the customer‟s cheques before recognizing sales revenue. Such a precaution would only be
justified in cases where there is a very high risk of the bank refusing to honour the cheque.
FINANCIAL ACCOUNTING 1
110 Accounting Theory
II) Bases
Bases are the methods that have been developed for expressing or applying fundamental accounting concepts to financial transactions and items.
Examples include:
Depreciation of Non current Assets (e.g. by straight line or reducing balance method)
Treatment and amortization of intangible assets (patents and trade marks)
Stocks and work in progress (FIFO, LIFO and AVCO)
III) Policies
Accounting policies are the specific accounting bases judged by business enterprises to be the most appropriate to their circumstances and adopted by
them for the purpose of preparing their financial accounts.
Understandability: an essential quality of the information provided in the financial statements is that it is readily understandable by users. For these
reason users are assumed to have a reasonable knowledge of business and economic activities and accounting.
Relevance: information has the quality of being relevant when it influences the economic decisions of users by helping them evaluate past, present or
future events or confirming or correcting their past evaluations. The relevance of information is affected by its nature and materiality.
Reliability: information is useful when it is free from material error and bias and can be depended upon by users to represent faithfully that which it
purports to represent or could reasonably be expected to represent. To be reliable then the information should:
a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and economic reality and not merely their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some events and transactions (prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information to be false.
Comparability: users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position
and performance. Users must also be able to compare the financial statements of different accounting policies, changes in the various policies and the
effect of these changes in the accounts. Compliance with accounting standards also helps achieve this comparability.
a) To promote standards of professional competence and practice amongst members of the institute.
b) To promote research into the subjects of accountancy and finance, and related matters, and the publication of books, periodicals, journals and
articles in connexion therewith;
d) To advise the Examinations board on matters relating to examination standards and policies;
e) To carry out any other functions prescribed for it under any of the provisions of the Act or under any other written law; and
A council known as the Council of the institute governs the Institute, which consists of the Chairman, nine members from the institute and one
member appointed by the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out practicing certificates and registration of qualified persons as members of
the institute.
The Act also outlines the following as the functions of IASNEB:
a) To prepare syllabuses for accountants‟ and secretaries‟ examinations, to make rules with respect to examinations, to arrange and conduct
examinations and issue certificates to candidates who have satisfied examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding functions.
FINANCIAL ACCOUNTING 1
112 Accounting Theory
(a) Define the following accounting concepts and for each explain their implication in the preparation of financial statements.
(b) Two accounting concepts or conventions could clash or there could be inconsistency between them.
Give two examples of such situations and explain how the inconsistency should be resolved.
4 marks
Solution:
Materiality prevents time being wasted on items which do not impact on the results of the entity; it provides a focus on the significant items.
(iv) Realization
The realization concept involves recognizing amounts in the financial statements at the point at which they crystallize. Profit should not be reflected in
the profit and loss account until it has been earned.
The realization concept means that the profit in the financial statements should be reasonably stated.
(Total: 19 marks)
(Covered adequately in the text)
FINANCIAL ACCOUNTING 1
114 Accounting Theory
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:
Question Two
Accounting practice depends upon the guidance provided by a number of accounting concepts, some of which are to be found in IAS 1 and/or in the
conceptional framework of the International Accounting Standards Committee.
Required:
(a) Define and explain the relevance of the following accounting concepts.
Neutrality
Money measurement
Accruals
Substance over form
Consistency (15 marks)
(b) Give two examples of situations in which there is a clash or inconsistency between two accounting concepts or conventions, and explain how the
inconsistency should be resolved. (In answering this part of the question, you need not confine yourself to considering the concepts listed in part
(a)) (5 marks)
(20 marks)
Question Three
If the information in financial statements is to be useful, regard must be had to the following:
Materiality
Comparability
Prudence
Objectivity
Relevance
Required
Explain the meaning of each of these factors as they apply to financial accounting including in your explanations one example of the application of each
of them. (Four marks for each of (a) to (e).)
(20 marks)
FINANCIAL ACCOUNTING 1
116 Accounting Theory
Question Four
a) Explain what is meant by materiality in relation to financial statements and state two factors affecting the assessment of materiality.
(4 marks)
b) Explain what makes information in financial statements relevant to users. (5 marks)
c)
1. Two characteristics contributing to reliability are „neutrality‟ and „prudence‟. Explain the meaning of these two terms.
2. Explain how a possible conflict between them could arise and how that conflict should be resolved.
(5 marks)
d) One of the requirements of financial statements is that they should be free from material error. Suggest three safeguards, which may exist,
inside or outside a company to ensure that the financial statements are free from material error.
(6 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON FOUR
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should be reported in the profit & loss account
and the same income will be shown in the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month, assuming that this is the first year of renting and rent is received in arrears
(rent 4 January is received early Feb).
The ledger accounts of the firm will be as follows:
Cashbook
Year 1 £
FINANCIAL ACCOUNTING 1
118 Adjustment to Final Accounts
22,000
Rent – Income
Year 1 £ Year 1 £
Jan C/B 2,000
Feb C/B 2,000
Mar C/B 2,000
April C/B 2,000
May C/B 2,000
Jun C/B 2,000
July C/B 2,000
Aug C/B 2,000
Sept C/B 2,000
Oct C/B 2,000
31/12 P&L 24,000 Nov C/B 2,000
Dec Accrued c/f 2,000
24,000 24,000
Although the cashbook is showing that rent received amounts £22,000, the full rental income of £24,000 will be reported in the Profit & Loss a/c as
rent income and the accrued rent for Dec of £2,000 will be reported in the balance sheet as a current asset.
Cashbook
Year 1 £ Year 1 £
Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
Apr (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 June) 2,000
Aug (rent 4 July) 2,000
FINANCIAL ACCOUNTING 1
120 Adjustment to Final Accounts
Rent – Expenses
Year 1 £ Year 1 £
C/B Rent for Jan 2,000
Rent for Feb 2,000
Rent for Mar 2,000
Rent for Apr 2,000
Rent for May 2,000
Rent for June 2,000
Rent for July 2,000
Rent for Aug 2,000
Rent for Sept 2,000
Rent for Oct. 2,000
Rent for Nov 2,000
31/12 Bal c/d 2,000 31/12 P&L 24,000
24,000 24,000
The cashbook shows that the rent for the 11 months was paid for. However in the P&L a/c we should report rent for the full year of £24,000 and
the £2,000, rent for Dec being the accrued expense will be shown in the balance sheet as a current liability.
PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an income is payable in advance e.g. Rent payable 3 months in
advance.
A prepaid income should not be reported in the current financial period but should be carried forward and reported in the period it relates to.
The accounting treatment will be to show it as a current liability.
Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance. Assuming that the firm‟s rental income began in 1st March and the
financial year, end is on 31st Dec. The ledger accounts will be:
FINANCIAL ACCOUNTING 1
122 Adjustment to Final Accounts
Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Income
Year 1 £ Year 1 £
1/3 Cashbook 15,000
1/6 Cashbook 15,000
P&L (10 x 5,000) 50,000 1/9 Cashbook 15,000
31/12 Bal c/d 10,000 1/12 Cashbook 15,000
60,000 60,000
Rent for the 4 quarters of 12 months has been received as per the cashbook but because the end of the financial year is at 31 Dec, rent for 2 months is
pre-paid. This £10,000 is not charged in the P&L but is carried forward as current liability in the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid expense should not be charged in the P&L a/c but
should be carried forward to the next financial period and should be shown in the balance sheet as a current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense. The ledger accounts is as follows:
Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Expenses
Year 1 £ Year 1 £
1/3 C/B (Mar, April, May) 15,000
1/6 C/B (June, July, Aug) 15,000
1/9 C/B (Sept, Oct, Nov) 15,000 P&L (10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb) 15,000 31/12 Bal c/d (2 x 5,000) 10,000
60,000 60,000
Rent of £10,000 for 2 months is carried forward to the next financial period and shown in the balance sheet as a current asset.
FINANCIAL ACCOUNTING 1
124 Adjustment to Final Accounts
Income
Prepaid -Not
reported Current
Liability
Accruals/
Prepayments
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance Sheet as follows:
Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x
X
The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that the correct amount of expense or income is
reported in the profit and loss account for the year.
Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger accounts for the following items including the balance transferred to
the necessary part of the final accounts, also the balances carried down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December 2002 £2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December 2002 £3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December 2001 £25,000; Owing as at 31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December 2001 £2,200; Prepaid as at 31December 2002 £2,900.
e) Seamers sub-lets part of the premises. Receives £5,500 during the year ended 31 December 2002. Tenant owed Seamers £1,800 on 31
December 2001 and £2,100 on 31 December 2002
a) Motor Expenses
19X6 £ 19X6 £
Cashbook 7,440
31/12 Bal c/d 280 P/L a\c 7220
7200 7200
19x7
1/1 Bal b/d 280
b) Insurance
19x6 £ 19x6 £
FINANCIAL ACCOUNTING 1
126 Adjustment to Final Accounts
19x6 £ 19x6 £
Cashbook 18,000 1/1 Bal b/d 2,500
31/12 Bal c/d 4,900 P&L a/c 20,400
22,900 22,900
==== ====
19x7
1/1Bal b/d 4,900
d) Rates
19x6 £ 19x6 £
1/1 Bal b/d 2200 P&L 8800
Cashbook 9500 31/12 Bal c/d 2900
11,700 11,700
19x7
1/1 Bal b/d 2900
e) Rent – Income
19x6 £ 19x6 £
1/1 Bal b/d 1800 Cashbook 5500
P&L 5800 31/12 Bal c/d 2100
7600 7600
19x7
1/1 Bal b/d 2100
FINANCIAL ACCOUNTING 1
128 Adjustment to Final Accounts
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A specific provision is where a debtor is known and chances of
recovering the debt are low.
The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be as follows. If it is the 1 st year of trading
(1st year of making provision):
In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision.
If it is an increase:
If it is a decrease:
i. Debit provision for doubtful debts.
ii. Credit P&L a/c (with the decrease in provision only).
Example
Debtors x
Bad debts (x)
x
Specific Provision (x)
x
General Provision (x)
x
A firm started trading in the year 1999, the balance on the debtor‟s account was £400,000. Bad debts amounting to £40,000 were written off from this
balance, there was a specific provision of £5,000 to be made to one of the debtors and a general provision of £5% was to be made on the balance of
the debtors. The ledger accounts of 1999 were as follows:
FINANCIAL ACCOUNTING 1
130 Adjustment to Final Accounts
400,000 400,000
Bad debts
1999 £ 1999 £
Debtors 40,000 31/12 P&L 40,000
£
Debtors 400,000
Bad debts (40,000)
360,000
Specific Provision (5,000)
355,000
General Provision (5%) (17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
£ £
Expenses:
Bad debts 40,000
Increase in provision for D/debts 22,750
FINANCIAL ACCOUNTING 1
132 Adjustment to Final Accounts
In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of £50,000 needs to be written off there is no specific provision but
the general provision is to be maintained at 5%. The ledger accounts will be as follows:
Debtors 500,000
Bad debts (50,000)
450,000
General Provision (5%) 22,500
427,500
Debtors
2000 £ 2000 £
Bal b\d 500,000 Bad Debts 50,000
______ Bal c\d 450,000
500,000 500,000
Bad Debts
2000 £ 2000 £
Debtors 50,000 31\12 P& L 50,000
Expenses
Bad debts 50,000
£ £
Current Assets
Debtors 450,000
FINANCIAL ACCOUNTING 1
134 Adjustment to Final Accounts
In the year 2001 the debtors balance goes up to £600,000 from which bad debts of £50,000 need to be written off, there is no specific provision but the
general provision is to be maintained at 5% the ledger accounts is as shown:
£
Debtors 600,000
Bad debts (50,000)
550,000
General provision % (27,500)
522,500
Debtors
2001 £ 2001 £
Bal b\ 600,000 Bad Debts 50,000
______ Bal c\d 550,000
600,000 600,000
Bad Debts
2001 £ 2001 £
Debtors 50,000 31\12 P& L 50,000
Profit And Loss Account (Extract) for the year ended 31/12/2001
£ £
Expenses
Bad debts 50,000
Increase in provision 5,000
Example 4.6
In a new business during the year ended 31 December 2002 the following debts are found to be bad, and are written off on the dates shown:
On 31 December 2002 the schedule of remaining debtors, amounting in total to £68,500, is examined, and it is decided to make a provision for
doubtful debts of £2,200.
FINANCIAL ACCOUNTING 1
136 Adjustment to Final Accounts
£ Bad Debts
Debtors 70,036 2002 £ 2002 £
Bad debts (1,860) Bad debts 1860 31/12 P\L 1860
68,500 Provision for D/Debt (2,200)
66,300
On 31 December 2001 there had been a total of debtors remaining of £405,000. It was decided to make a provision for doubtful debts of £5,500.
On 31 December 2002 there had been a total of debtors remaining of £473,000. It was decided to make a provision for doubtful debts of £6,000.
Solutions
Bad debts = 2,250
405,000
Provision (5,500)
399,500
Bad Debts
2001 £ 2001 £
31\8 W.Best 850
30\9 S.Aron 1400 31\12 P&L 2250
2250 2250
2001 £ 2001 £
1\1 Bal b\d 550
1\1 Bal c\d 600 31\12 P&L 50
600 600
Bad Debts
FINANCIAL ACCOUNTING 1
138 Adjustment to Final Accounts
2001 £ 2001 £
28/2 J. Friend 1,800
31/8 N. Kelly 600
30/11 A. Oliver 2,500 31/13 P&L 4,900
4,900 4,900
19x6 £ £
Expenses
Bad debts 2,250
Provision for Doubtful Debts 5,000
19x7
Bad debts 4,900
Increase in provision for D/Debts 500
Current Assets
Debtors 405,000
Less provision (5,500) 399,500
19x7
Debtors 473,000
Less: provision (6,000) 467,000
Debtors x
Bad debts (x)
x
FINANCIAL ACCOUNTING 1
140 Adjustment to Final Accounts
Expenses
Bad debts x
Increase in provision for D/Debts x
Increase in provision for discounts allowed x
Current Assets £ £
Debtors x
Less: provision for Doubtful Debts (x)
Less: provision for discounts allowed (x) x
Example:
A firm recovers debts amounting to £10,000 that had been written off in the previous periods. In the same financial period the firm writes off bad
debts amounting £30,000. The ledger accounts will be as follows:
Bad debts
£ £
Debtors 30,000 Bad Debt Recovered 10,000
P\L 20,000
FINANCIAL ACCOUNTING 1
142 Adjustment to Final Accounts
30,000 30,000
Items Appearing In The Cashbook And Not Reflected In The Bank Statement.
Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but have not been presented to the firm‟s bank
for payment.
Uncredited deposits/cheques: These are cheques received from customers and other sources for which the firm has banked but the bank has not yet
availed the funds by crediting the firm‟s account.
Errors made in the cashbook
These include:
Payments over/understated
Deposits over/understated
Deposits and payments misposted
Overcastting and undercasting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the cashbook:
FINANCIAL ACCOUNTING 1
144 Adjustment to Final Accounts
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per cashbook (updated) x
Add: Un presented cheques x
Errors on Bank Statement (see note 1) x x
x
Less: Uncredited deposits x
Errors on Bank Statement (see note 2) x (x)
Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit or an overstated payment by the bank, or
making an unknown payment.
Format 2
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per bank statement x
Add: Uncredited deposits x
Add errors on bank statement (note 2) x x
x
Less: Unpresented cheques x
Errors on bank statement (note 1) x (x)
Balance at bank as per cashbook (updated) x
===
Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on the bank statement, from the following as
on 31 March 2003:
£
Cash at bank as per bank column of the cashbook (Dr) 38,960
Bankings made but not yet entered on bank statement 6,060
Bank charges on bank statement but not yet in cashbook 280
Un presented cheques C Clarke 1170 Standing order to ABC Ltd entered on bank
statement, but not in cash book 550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook 1,890
FINANCIAL ACCOUNTING 1
146 Adjustment to Final Accounts
Solution
Cashbook – Bank
19X9 £ 19X9 £
31/3 Bal b/d 38960 Bank charges 280
ABC (standing order) 550
A Wood (credit transfer) 1890 31/3 Bal C/D 40,020
40,850 40,850
£ £
Balance at bank as per cashbook 40,020
Add: Unpresented cheques 1,170
41,190
Less: Uncredited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
Example 4.9
The following are extracts from the cashbook and the bank statement of J Richards. You are required to:
a) Write the cashbook up to date, and state the new balance as on 31 December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.
Cashbook
2002 Dr £ 2002 Cr £
Dec 1 Balance b/d 1,740 Dec 8 A Dailey 349
Dec 7 J Map 88 Dec 15 R Mason 33
Dec 22 J Cream 73 Dec 28 G Small 115
Dec 31 K Wood 249 Dec 31 Balance c/d 1,831
Dec 31 M Barrett 178
2,328 2,328
Bank Statement
2002 Dr Cr Balance
£ £ £
Dec 1 Balance b/d 1,740
Dec 7 Cheque 88 1,828
Dec 11 A Dailey 349 1,479
Dec 20 R Mason 33 1,446
Dec 22 Cheque 73 1,519
Dec 31 Credit transfer: J Walters 54 1,573
Dec 31 Bank charges 22 1,551
Cashbook –Bank
2002 £ 2002 £
31/12 Bal b/d 1,831 31/1 Bank charges 22
31/12 J. Walters (C/T) 54 31/12 Bal C/D 1,863
1,885 1,885
FINANCIAL ACCOUNTING 1
148 Adjustment to Final Accounts
J. Richards
Bank Reconciliation Statement as at 31/12/2002
£ £
Balance at bank as per cashbook – bank 1,863
Add: Unpresented cheques – (G Small) 115
1,978
Less: Uncredited deposits
K Wood 249
M. Barret 178 (427)
Balance at bank as per balance sheet 1,551
OR:
Balance at bank as per balance sheet 1,551
Add: Uncredited deposits:
K. Wood 249
M. Barret 178
1,978
Less: Unpresented cheques (115)
Balance at bank as per cashbook – bank 1,863
9. An old cheque payment amounting to Sh.44, 000 had been written back in the cashbook but the bank had already honored it.
10. Some of Ssemakula‟s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had
credited some deposits amounting to Sh.832, 500 to another customer‟s account. However acting on information from his customers
Ssemakula had actually entered the expected receipts from the debtors in is cashbook.
Required:
i. A statement showing Ssemakula‟s adjusted cashbook balance as at 30 June 2001. (9 marks)
ii. A bank reconciliation statement as at 30 June 2001. (5marks)
(Total: 20 marks)
Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.
b) ADJUSTED CASHBOOK
2,397,500 2,397,500
SSEMAKULA
FINANCIAL ACCOUNTING 1
150 Adjustment to Final Accounts
Sh. Sh.
Cash at bank as per the updated cashbook 1,615,000
Add: Unpresented cheques 22,500
1,637,500
Less: Uncredited cheques 98,500
Error on bank statement 832,500 (931,000)
Balance as per the bank statement 706,500
FINANCIAL ACCOUNTING 1
152 Adjustment to Final Accounts
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was in transit and two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as Sh.26, 500 and Sh.36, 000 and in the bank statement as Sh.62, 500
and Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but was dishonored and the advice was received on 4 November
1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for Sh.5, 800 and Sh.33, 500 respectively.
Required:
a) A correct cashbook balance. (8 marks)
b) A bank reconciliation statement on 31 October 1996. (8 marks)
(Total: 20 marks)
FINANCIAL ACCOUNTING 1
154 Adjustment to Final Accounts
No 96 Q4
CASHBOOK (ADJUSTED)
Sh. Sh.
Balance as per the cashbook 365,875
Add: Unpresented cheques 63 31,000
64 51,000 82,000
447,875
Less: Unaccredited cheques
Deposits (82,000)
Balance as per the bank statement 365,875
FINANCIAL ACCOUNTING 1
156 Adjustment to Final Accounts
Revenue Expenditure: There‟s an amount spent by the firm in the normal trading process or to assist in earning revenues or income. Examples:
i. Postage and stationery.
ii. Carriage outwards (sales).
iii. Repairs and maintenance.
Example 4.10
For the business of K Spinns,a wholesaler, classify the following between „capital‟ and „revenue‟ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
k) Revenue expenditure
l) Capital expenditure.
e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the firm. IAS 16 on property, plant and equipment defines depreciation
as the allocation of a depreciable amount of a non-current asset over its estimated useful life.
Under the matching concept, all incomes or revenues and expenses for a particular period should be reported in the financial statements and because
depreciation is an expense of the business therefore, it will be charged in the P&L A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a
business grows or expands then some buildings may become inadequate due to space. Also some machines that are unable to
manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil. Such assets include mines, oil wells, and
quarries.
FINANCIAL ACCOUNTING 1
158 Adjustment to Final Accounts
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c for a particular asset and is based on the following formular:
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value / Scrap Value.
Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight years. After the eight years the machine will be sold for £20,000.
Under the straight-line method, the depreciation amount will be computed as follows:
This means for this asset £10,000 will be charged in the P&L account as depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly over the life of the asset e.g. buildings use
straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of use. The same rate is applied in the
subsequent financial periods but the rate is applied on the reduced value of the asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier periods of use and lower amounts in the latter
periods of use as shown in the following example:
Example 4.12
FINANCIAL ACCOUNTING 1
160 Adjustment to Final Accounts
Assume a firm buys machinery for £100,000 and provides depreciation on machines at 20% p.a. on reducing balance method. The depreciation
charged to the P&L will be as follows for the next 3 years.
Year 1
£
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1
Balance to YR 2 80,000
Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2
Balance to YR 3 64,000
Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3
Balance to YR 4 51,200
Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of an asset are higher in the first periods of
use and lower in the latter periods e.g.
Fixtures, furniture and fitting.
Plant and machinery.
Motor vehicles.
FINANCIAL ACCOUNTING 1
162 Adjustment to Final Accounts
Expenses £ £
Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x
Land x - x
Buildings x (x) x
Plant and Machinery x (x) x
Furniture, Fixtures & fittings x (x) x
Motor vehicles x (x) x
x x x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars account and the provision for depreciation account for the year
ended 31 December 2002 from the information given below. Depreciation is at the rate of 20 per cent per annum. Using the basis of one month‟s
ownership needs one month‟s depreciation.
Motorcars a/c
2002 £ 2002 £
1/1 Cashbook 24,000
1/7 Cashbook 14,000 31/12 Bal c/d 38,000
38,000 38,000
FINANCIAL ACCOUNTING 1
164 Adjustment to Final Accounts
Expenses £ £
Depreciation:
Motor vans 6200
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31 December.
You are to show:
Depreciation is at the rate of 10 per cent per annum, using the straight-line method, plant being depreciated for each proportion of a year.
FINANCIAL ACCOUNTING 1
166 Adjustment to Final Accounts
Plant a/c
1999 £ 199 £
1/1 Cashbook 8000 31/12 Bal c/d 8000
2000 2000
1/1 Bal b/d 8000
1/7 Cashbook 10,000
1/10 Cashbook 6,000 31/12 Bal c/d 24,000
24,000 24,000
2001 2001
1/1 Bal b/d 24,000 31/12 Bal c/d 24,000
2002 2002
1/1 Bal b/d 24,000
1/4 Cashbook 2,000 31/12 Bal c/d 26,000
26,000 26,000
2000
£10,000 x 10/100 x 6/12 = 500
2001
£24,000 x 10/100 x 12/12 = 2400 4,650
2002
FINANCIAL ACCOUNTING 1
168 Adjustment to Final Accounts
2000 £ 2000 £
1/1 Bal b/d 800
31/12 Bal c/d 2,250 P&L 1,450
2,250 2,250
2001 £ 2001 £
1/1 Bal b/d 2,250
31/12 Bal c/d 4,650 P&L 2,400
4650 4650
2002 £ 2002 £
1/1 Bal b/d 4,650
31/12 Bal c/d 7,200 P&L 2,550
7,200 7,200
1999
Motor vans 24,000 (2,250) 21,750
1999
Motor vans 24,000 (4,650) 19,350
1999
Motor vans 26,000 (7,200) 18,800
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
When an asset is disposed and is no longer used by the firm, the appropriate entries should be made in the asset account and the total depreciation
provided to date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance company accept liability but by the end of the
period the insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.
FINANCIAL ACCOUNTING 1
170 Adjustment to Final Accounts
If the insurance pays before the end of the financial period, it will not be necessary to create an insurance debtor so the following entries will be made:
Debit – cashbook.
Credit – asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries will be made in the asset account and provision for depreciation a/c
only.
The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A credit balance represents a profit on disposal,
which is reported in the profit and loss a/c together with other incomes. The entry will be:
A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is £800. The firm decides to trade in the motor vehicle with a new one
the value of the new one being £500. The supplier of the new vehicle agree with the firm that the old motor vehicle is worth £300, therefore the
difference will be paid by cash.
£ £
Motor vehicle a/c 1,000 Provision for depreciation 800
P&L 100 Motor vehicle 300
1,100 1,100
JOURNAL ENTRIES £ £
Debit – motor vehicles disposal 1,000
Credit – motor vehicles a/c 1,000
(Motor vehicle being traded in now transferred to disposal a/c)
In case of a loss,
FINANCIAL ACCOUNTING 1
172 Adjustment to Final Accounts
If the firm trades in an old asset for a new one, the following entries will be made in addition to the movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for each month of ownership. From the following details
draw up the plant account and the provision for depreciation account for each of the years 1999, 2000, 2001 and 2002.
You are also required to draw up the plant disposal account and the extracts from the balance sheet as at the end of each year.
Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500
2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d 1,500
2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d 2,050
2,050 2,050
2002 2002
1/1 Bal b/d 2,050 30/9 Disposal 900
31/12 Bal c/d 1,150
2,050 2,050
1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210
2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510
2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865
2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230
FINANCIAL ACCOUNTING 1
174 Adjustment to Final Accounts
210
2000
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
2001
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
1/2 550 6 20/100 x 550 x 6/12 = 55
355
2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365
A firm may change its depreciation policy in several ways e.g. from straight line to reducing balance or vice versa, or it may increase/decrease the
number of estimated useful years of an asset. A firm should always follow the depreciation policy adopted consistently and incase there is need to
change the policy may be due to a new accounting standard or change in circumstances. This change should be disclosed in the financial statements.
When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation to be charged in the Profit and loss
account .IAS 16 requires that depreciation should be based on the remaining net book value at the start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10 years. The firm depreciates the machines on a straight-line basis on the
years of the number of estimated useful years. In the 4 th year, the estimated useful life of the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried down for year 4. Change for 10yr – 8 yr is same as change from 10%
to 12.5%
FINANCIAL ACCOUNTING 1
176 Adjustment to Final Accounts
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
1/1 Bal b/d 20,000
31/12 Bal c/d 30,000 31/12 P&L 10,000
30,000 30,000
Year 4 Year 4
1/1 Bal b/d 30,000
31/12 P&L 14,000
31/12 Bal c/d 44,000
44,000 44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease but increases from 10 years to 13 years.
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
31/12 Bal c/d 30,000 1/1 Bal b/d 20,000
Year 4 Year 4
1/1 Bal b/d 30,000
31/12 Bal c/d 37,000 31/12 P&L 7,000
37,000 37,000
REVALUATION OF NON CURRENT ASSETS
Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.g. land and buildings. IAS 16 on property, plant and
equipment requires that such assets may be carried in the accounts at the revalued amounts (may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but for buildings, changes should be made at the cost and depreciation
reserve account is usually opened for the purpose of these adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset Cost Depreciation
FINANCIAL ACCOUNTING 1
178 Adjustment to Final Accounts
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices and these are revalued at:
Land -£ 1,200,00 Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land 1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings 900,000 – 800,000)
(c) Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£ £
Bal B/D 1,000,000
Revaluation reserve __200,000 Bal C/D 1,200,000
1,2000,000 1,200,000
Buildings a/c
£ £
Bal B/D 800,000
Revaluation reserve 100,000 Bal C/D 900,000
900,000 900,000
Revaluation Reserve a/c
£ £
Land 200,000
Buildings 100,000
Bal C/D 340,000 Provision for depr. 40,000
340,000 340,000
FINANCIAL ACCOUNTING 1
180 Adjustment to Final Accounts
Any depreciation to be charged for the buildings should be based on the revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged in the P & L and will also be the Bal c/d in the provision for
depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land and buildings downwards in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Land
Year 3 £ Year 3 £
P&L 100,000
1,200,000 1,200,000
Buildings
Year 3 £ Year 3 £
1/1 Bal B/D 900,000 31/12 Revaluation 100,000
P&L 100,000
_______ Bal C/D 700,000
900,000 900,000
Revaluation Reserve
Year 3 £ Year 3 £
31/12 Land 200,000 1/1/ Bal B/D 340,000
31/12 Building 100,000
31/12 Prov. For depr. _40,000 _______
340,000 340,000
Required:
a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years.
(7 marks)
FINANCIAL ACCOUNTING 1
182 Adjustment to Final Accounts
a
Vehicle 1990 1991 1992 1993 1994
KA 560,000 560,000 560,000 560,000
KB 720000 720,000 - - -
KC - - 800,000 - -
KD - - 800,000 800,000 800,000
KE - - - - 840,000
KF - - - - 960,000
Total cost 1,280,000 1,280,000 2,160,000 1,360,000 2,600,000
Depreciation at 25% 320,000 320,000 540,000 340,000 650,000
Motor Vehicle
1990 Sh 1990 Sh
1/3 Cashbook 1,280,000 31/12 Bal c/d 1,280,000
1991 1991
1/1 Bal b/d 1,280,000 31/12 Bal c/d 1,280,000
1992 1992
FINANCIAL ACCOUNTING 1
184 Adjustment to Final Accounts
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company‟s balance sheet included the following figures:
l
1. I January 2000 The company decided to adopt a policy of revaluing its buildings; and they were revalued to £3.4m.
FINANCIAL ACCOUNTING 1
186 Adjustment to Final Accounts
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000. Accumulated depreciation on this plant at 30 June 1999 amounted to
£230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the purchase price was settled by part exchanging another motor vehicle,
which had cost £20,000, at an agreed value of £12,000. the balance of £18,000 was paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999 of £10,000
Required:
Prepare ledger accounts to record these transactions in the records of Pentland Limited.
(16 marks)
Land
1999 £ 1999 £
1/7 Bal b/d 4,000
2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 5,200
5,200 5,200
Buildings
1999 £ 1999 £
1/7 Bal b/d 2,200
2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 3,400
3,400 3,400
Revaluation Reserve
2000 £ 2000 £
1/1 Buildings 1,200
30/6 Bal C/D 2,022 1/1 Provision for depr. 822
2,022 2,022
2000 2000
1/1 Revaluation 822 30/6 P&L
2,200 x ½ x 15
30/6 Bal c/d 34_ 3,400 x ½ x 15 56_
856 856
Plant
1999 £ 1999 £
1/7 Bal B/D 1,600
2000 2000
1/1 Cashbook 400 1/1 Disposal 300
_____ 30/6 Bal c/d 1,700
2,000 2,000
2000 2000
1/1 Disposal 252.50 30/6 P&L 247.50
Bal c/d 595.00
FINANCIAL ACCOUNTING 1
188 Adjustment to Final Accounts
847.50 847.50
Motor Vehicles
1999 £ 1999 £
1/7 Bal b/d 600
2000 2000
1/4 Disposal 12 1/4 Disposal 20
1/4 Cash book 18 30/6 Bal C/D 610
630 630
2000 2000
1/4 Disposal 13 1/4 P&L 120.5
30/6 Bal c/d 307.5 30/6 Bal C/D ______
320.50 320.50
Plant - Disposal
2000 £ 2000 £
1/1 Plant 300 1/1 Provision for depr. 252.50
P&L 2.50 Cash book 50___
25 302.50
Property, Plant and Equipment Schedule (Formerly fixed asset movement schedule)
The property, plant and equipment schedule is a summary report on the balances and transactions of the asset and provision for depreciation account as
per the requirements of IAS 16 to be reported in the published accounts of companies. The format is as follows:
FINANCIAL ACCOUNTING 1
190 Adjustment to Final Accounts
(£) Long leases Short lease Machinery And fittings (£) (£)
(£) (£) (£)
Bal as at 1/1/01 x x x x x x
Additions xx xx xx xx xx xx
Revaluations xx - - - - xx
(gains)
Reclassifications - (xx) xx - - -
Disposals (xx) (xx) (xx) (xx) (xx) (xx)
Bal as at
31/12/01 xx xx xx xx xx xx
Depreciation/
Amortization
Bal as at 1/1/10 xx - xx xx xx xx
Change for year xx - xx xx xx xx
Revaluation (xx) - (xx) (xx) (xx) (xx)
Eliminated on
Disposal (xx) - (xx) (xx) (xx) (xx)
Bal as at -
31/12/01 (xx) (xx) (xx) (xx) (xx)
N.B. V as at xx xx xx xx xx xx
31/12/01
NBV as at xx xx xx xx xx xx
31/12/01
Additional information is in this schedule called reclassifications where some of the non-current assets are transferred into a different class. (e.g.) some
of the properties hold under long leases (over 50 years) will be transferred to the short leases classes when their term becomes less than 50 years. This
is a reclassification from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the long lease class and on
addition in the short lease class
FINANCIAL ACCOUNTING 1
192 Adjustment to Final Accounts
1. It is the company‟s policy to write off cost of the assets using above percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in during the year at a value of sh.157,500 in part exchange of the new
delivery truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company that went out of business. At the time of acquisition sh.90,000 was
paid to have the assets revalued by a professionally qualified valuer. The revaluation indicated the following market values.
Sh.
Land 900,000
Buildings 600,000
Machinery 300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company‟s accounts for the year ended 30 April
2000. (10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm. IAS 16 on property plant and equipment defines
depreciation as allocation of a depreciable amount of a non-current asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses that relate to a particular financial period and therefore because the
firm to earn revenue or income uses the assets, then the loss of value should be marched with these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.
FINANCIAL ACCOUNTING 1
194 Adjustment to Final Accounts
Depreciation
Bal as at 1/5/99 4,755,000 300,000 1,470,000 6,525,000
Charge for the year 1,066,500 112,500 931,687.5 2,110,687.5
Eliminated on disposal (37,500) -______ (124,125) (161,625)
Bal as at 30/4/2000 5,784,000 412,500 2,277,562.5 8,474,062.5
NBV 1/5/99 8,332,500 600,000 2,055,000 10,987,500
NBV 30/4/2000 8,916,000 487,500 1,449,187.5 10852,687.8
Workings:
= 141,000
At 2.5% = 2,925,000 x 2.5% x 4 = 292,500
4% = 292,500 x 4% x 4 = 468,000
175,500
FINANCIAL ACCOUNTING 1
196 Adjustment to Final Accounts
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and purchases ledgers. The control accounts for the month of September 1999
are in balance and incorporate the following totals:
£
Sales ledger:
Balances at 1 September 1999: Debit 386,430
Credit 190
Sales 163,194
Cash received 158,288
Discounts allowed 2,160
Sales returns inwards 590
Credit balances at 30 September 1999 370
Purchases ledger:
Balances at 1 September 1999: Credit 184,740
Debit 520
Purchases 98,192
Cash payments 103,040
Discounts received 990
Purchases returns outwards 1,370
Debit balances at 30 September 1999 520
Although the control accounts agree with the underlying ledgers, a number of errors have been found, and there are also several adjustments to be
made. These errors and adjustments are detailed below:
1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the sales ledger account for the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed account. As a result, the supplier issued a credit note for £2,000 on
26 September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the account of R Jones.
8. A debit balance of £420 existed in the purchases ledger at the end of August 1999. The supplier concerned cannot now be traced and it has
been decided to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should appear after allowing, where necessary, for the errors and adjustments
listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its debtor collection system, the company maintains a sales ledger
control account. In preparing the accounts for the year to 31 October 20X3 the accountant discovers that the total of all the personal accounts in the
sales ledger amounts to £12,802, whereas the balance on the sales ledger control account is £12,550.
1. Sales for the week ending 27 March 20X3 amounting to £850 had been omitted from the control account.
2. A debtor‟s account balance of £300 had not been included in the list of balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell‟s sales ledger account.
10. Returns inwards valued at £200 had not been included in the control account.
11. Cash received of £80 had been credited to a personal account as £8.
12. A cheque for £300 received from a customer had been dishonored by the bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended sales
ledger control account balance.
QUESTION THREE
FINANCIAL ACCOUNTING 1
198 Adjustment to Final Accounts
George had completed his financial statements for the year ended 31 March 1999, which showed a profit of £81,208, when he realized that no bank
reconciliation statement had been prepared at that date.
When checking the cashbook against the bank statement and carrying out other checks, he found the following:
1. A cheque for £1,000 had been entered in the cashbook but had not yet been presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31 March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but have not been recoded by George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had been mistakenly entered in the cash book and the plant account as
£2,900. Depreciation of £290 had been charged in the profit and loss account for this plant.
5. A cheque for £980 from a credit customer paid in on 26 March was dishonoured after 31 March and George decided that the debt would have
to be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been entered in the cash book as a debit and posted to the credit of
motor vehicles account. Depreciation at 25% per annum (straight line) is charged on motor vehicles, with a full year‟s charge calculated on the
balance at the end of each year.
7. The total of the payments side of the cash book had been understated by £1,000. On further investigation it was found that the debit side of
the purchases account had also been understated by £1,000.
George had instructed his bank to credit the interest of £160 on the deposit account maintained for surplus business funds to the current account. This
the bank had done on 28 March. George had made an entry on the payments side of the cashbook for this £160 and had posted it to the debit of
interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a cheque drawn on the business account. The entry in the cashbook had
been debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account in the purchases ledger, using a cheque drawn on George‟s personal
bank account. No entries have yet been made for this transaction.
The cashbook showed a debit balance of £4,890 before any correcting entries had been made. The balance in the bank statement is to be derived in
your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should appear in George‟s balance sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999. (2 marks)
3. Draw up a statement for George showing the effect on his profit of the adjustments necessary to correct the errors found.
(8 marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995. The difference was put in the suspense account. The final
accounts which were then prepared showed a net profit of Sh. 64,000. During audit, the following errors were noted:
A loan from ABD Bank of Sh 10,000 was entered correctly in cash book but was not posted to the ledger.
A cheque of Sh. 4,000 for rent was not entered in the books.
Closing stock was overvalued by Sh 1,500.
Discount allowed of Sh 500 was entered in the discount-received account.
The opening stock was understated by Sh 3,200.
Prepaid insurance of Sh 220 had been included in the profit and loss account.
Goods destroyed by fire amounting to Sh 12,000 were written off in the profit and loss account. However, the insurance company has
agreed to compensate the full amount.
Required:
1. Journal entries to correct the errors. (8 marks)
2. Statement of corrected profit. (2 marks)
3. Suspense account. (2 marks)
(Total: 20 marks)
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on 31 st December 2002:
£ £
Capital 40,000
Purchases 26,154
Sales 36,246
Salaries 4,814
Opening stock 4,307
FINANCIAL ACCOUNTING 1
200 Adjustment to Final Accounts
Insurance 820
Rent 965
Buildings 25,000
Furniture 14,500
Debtors 6,140
Other expenses 1,060
Creditors 4,638
Commission _____ __946
82,795 82,795
Adjustments:
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and transactions relating to the company‟s control accounts for the month
of December 1994 are listed below:
Required:
Post the sales ledger and the purchases ledger control accounts for the month of December 1994 and derive the respective debit and credit closing
balances on 31 December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
202 Further Adjustments to Accounts
LESSON FIVE
(i) Sales ledger control Account – also called total debtors. The balance on the sales ledger control account should be the same as the total of
the balances in the sale ledger.
(ii) Purchases Ledger Control Account – also called total creditors .The balance carried down (Bal c/d) on the purchases Ledger Control
Account should be the same as the total of the balances in the purchases ledger.
SALES LEDGER
Debtor A a/c
Debtor B a/c
Debtor C a/c
FINANCIAL ACCOUNTING 1
204 Further Adjustments to Accounts
Debtor D a/c
PURCHASES LEDGER
Creditor A
Creditor B
Creditor C
Creditor D
1. Balance b/d of the total debit 1. Total credit balances of the sales
balances from previous period ledger brought forward
2. Total credit sales for the period (from 2. Total cash received from credit
the sales journal) customers/debtors (from cash book)
3. Refunds to customers (from 3. Total cheques received from credit
cashbook) customers/debtors (from cash book)
4. Dishonored cheques (from cashbook) 4. Total returns-inwards (returns-inwards
journal)
5. Bad debts recovered (from general 5. Total cash discount allowed to
journal) customers (from cash book)
6. Bad debtors written-off (from general
journal)
7. Cash received from bad debtors
recovered (cash book)
8. Purchases Ledger contra
FINANCIAL ACCOUNTING 1
206 Further Adjustments to Accounts
6. Total credit balances of the sales 10. Total debit balance carried down to
Ledger carried forward the next period – to be derived after
posting all those transactions
Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes place when there is a credit balance on the debtor‟s a/c and the
customer is not a creditor too.
The entry will be:
Example:
Debtor A
£ £
Sales 1000 Cashbook 950
(Refunds) C/B 100 Discounts 50
Returns 100
1100 1100
If the firm has not paid this amount owed to the customer, then it‟s carried forward to the next period then is a credit balance in the customer‟s a/c.
Therefore, if a firm has several customer, this information will be shown in the control a/cs as total balance c/f
(debit side).
Example:
Debtor (A)
Creditor (A)
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase or decrease in provisions for doubtful debts will not
affect this account.
FINANCIAL ACCOUNTING 1
208 Further Adjustments to Accounts
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some cases it can be included especially where there are
incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers‟ account may also be shown on the debit side of the sales ledger control. However when
trying to determine the turnover under incomplete records then it is wise to omit it.
Example 5.1
You are required to prepare a purchases ledger control account from the following for the month of June. The balance of the account is to be taken as
the amount of creditors as on 30 June.
2003 £
June 1 Purchases ledger balances 36,760
Totals for June:
Purchases journal 422,570
Returns outwards journal 10,980
Cheques paid to suppliers 387,650
Discounts received from suppliers 8,870
June 30 Purchases ledger balances ?
Solution
Purchases Ledger Control A/C
2003 £ 2003 £
Returns out 10,980 Bal b/d (1/6) 36,760
Bank 387,950
Discounts received 8,870
Bal c/d (30/6) 51,830 Purchases 422,570
459,330 459,330
Example 5.2
Prepare a sales ledger control account from the following:
£
2003
May 1 Debit balances 64,200
Totals for May:
Sales journal 128,000
Cash and cheques received from debtors 103,700
Discounts allowed 3,950
Solution
FINANCIAL ACCOUNTING 1
210 Further Adjustments to Accounts
(a) Explain the purposes for which control accounts are prepared. (3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of November 1997 are listed below:-
Sh.
Balances on 1 November 1997:
Sales ledger 9,123,000 (debit)
211,000 (credit)
Purchases ledger 4,490,000 (credit)
88,000 (debit)
Transactions during November 1997:
Purchases on credit 18,135,000
Allowances from suppliers 629,000
Receipts from customers by cheques 27,370,000
Sale on credit 36,755,000
Discount received 1,105,000
Payments to creditors by cheques 15,413,000
Contra settlements 3,046,000
Bills of exchange receivable 6,506,000
Allowances to customers 1,720,000
Customers cheques dishonored 489,000
Cash received from credit customers 4,201,000
Refunds to customers for overpayments 53,000
Discounts allowed 732,000
Balances on 30 November 1997
Sales ledger 136,000 (credit)
Purchases ledger 67,000 (debit)
Required:
The sales ledger and purchases ledger control accounts for the month of November 1997 and show the respective debit and credit closing balances on
30 November 1997.
(17 marks)
(Total: 20 marks)
(a)
i) Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)
ii) To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
iii) To detect and prevent errors and frauds in the customers and suppliers account.
iv) To facilitate delegation of duties among the debtors and creditors clerks.
FINANCIAL ACCOUNTING 1
212 Further Adjustments to Accounts
Kopesha Ltd
Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April 2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
Errors that don‟t affect the trial balance
Errors that affect the trial balance
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not made e.g. a sales invoice of £400 is not posted in the
sales journal therefore no entry is made in the debtor‟s account and the sales account i.e. both debit of £400 in debtor‟s account and credit of £ 400 in
the sales account.
The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
FINANCIAL ACCOUNTING 1
214 Further Adjustments to Accounts
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same class. Example: a credit sale to T Thompson is posted
to L Thompson‟s account for an amount of £ 200. Instead of a debit to T Thompson‟s account it is made to L Thompson‟s account and the
corresponding credit in the sales account is correct.
Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors.
To correct this error a transfer is made from L Thompson‟s account to T Thompson by:
£
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different class e.g. Motor vehicle purchased for £ 400 is posted
to the motor vehicle expenses a/c. (Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is
correct)
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account. Therefore a capital expenditure has been
posted as revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
£
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400
To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
To correct the error of £ 150 posted in the wrong sides of these account
To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct balance. In this case, we will:
£
Debit cash book 90
Credit debtors 90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or credits then another error may take place
to overstate the debits or credits by the same amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but shown
in the trial balance as £3,890 and another error carried to the trial balance of fixture amounting to £4,540 instead of £4,450:
FINANCIAL ACCOUNTING 1
216 Further Adjustments to Accounts
£
Purchases 3,980
3,890
(90)
£
Fixtures 4,450
(4,540)
90
Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are required.
a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton‟s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
Solution
THE JOURNAL
Debit Credit
Sales 10,000
Capital 10,000
Additional capital passed into sales a/c now
transferred to capital a/c
Drawings 700
General expenses 700
Drawings debited in general expense now
transferred to drawing a/c
Drawings 89
Insurance 89
Private insurance transferred from insurance
a/c to drawings a/c
Purchases 270
C Kelly 270
Purchases and creditors amount to 857
initially entered as £587
Bank 390
Cash 390
Correct error in posting
Bank 390
Cash 390
To post the cash banked correctly
Bank 400
Cash 400
Cash drawings correctly started from bank to
cash
J Charlton 168
M McCarthy
Returns in from McCarthy entered in error
in J Carlton now transferred to his a/c 168
Motor expenses 1000
Motor disposal a/c 1000
FINANCIAL ACCOUNTING 1
218 Further Adjustments to Accounts
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
1. The closing stock includes damaged goods which, although they had cost Sh. 10,000 have an estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt. A provision for doubtful debts of 2 ½% is also required on the
balance of the debtors.
3. The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-line basis over eight years. A more realistic
estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been reflected in the accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr. Patel had been deducted as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party had not been received and no entry had been
made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions. (10 marks)
b) A statement of revised profit for the year ended 31 March 2000. (8 marks)
c) A revised balance sheet as at 31 March 2000. (7 marks)
(Total: 25 marks)
Solution
a) THE JOURNAL
Debit Credit
Trading account 2,500
Stock 2,500
Being a reduction in stock for damaged goods
Profit and loss(Bad debts) 20,000
Debtors 20,000
Debtors gone bankrupt written off
Profit and loss) 10,000
FINANCIAL ACCOUNTING 1
220 Further Adjustments to Accounts
Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the credits. The debits may be more than the credits and
vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash received from a debtor is debited to the
cashbook and no other entry is made in the account, i.e. no credit entry on the debtor‟s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a payment to a creditor of £ 300 is credited in the
cashbook and also credited in the creditor‟s accounts.
FINANCIAL ACCOUNTING 1
222 Further Adjustments to Accounts
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit. Example – cash received from a debtor of £ 450 is
debited in the cashbook as £ 450 and credited as £ 540 in the debtor‟s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts or when taken up to the trial balance.
Example Bal c/d in the cash book for cash at bank of £ 2000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The
balance may also be brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made through an account called a suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are posted here. The balance to be shown on the
suspense accounts depends on which side the error is shown on the trial balance.
If the debits credits, then an amount is included on the credit side of the trial balance so that the debits = credits. This is a credit balance and will be
taken to the suspense account on the credit side.
Example:
DR CR
Total 240 200
Suspense - 40
240 240
Suspense a/c
£ £
Difference as per T/B 40
If the credits are more than the debits this is a debit balance and therefore we require an amount to be added to the total of the debits for the two side
to be same. This debit balance is posted to the debit side of the suspense a/c.
DR CR
Total 260 300
Suspense 40 -
300 300
Suspense a/c
£ £
Difference as per T/B 40
Posting the correct entries should eliminate the balance on the suspense account.
In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance. This balance depends on whether it is a
credit or debit and whether it is material or not for purposes of proper accounting treatment. The following is the recommended approach:
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a shortage on the credit side of the trial balance. A
suspense account was opened for the difference.
In January 2003 the following errors made in 2003 were found:
Solution
THE JOURNAL
£ £
Suspense 1,000
Sales ,1000
Sales under cast of £100 now corrected
FINANCIAL ACCOUNTING 1
224 Further Adjustments to Accounts
J Church 2,500
J Chane 2,500
Sale to J Church posted to J Chane corrected
Rent 700
Suspense 700
Under cast in rent balance now corrected
Suspense 3,000
Discount received 3,000
Under cast in discount received balance now corrected
Sales a/c 3,600
Disposal ,3600
Sale of motor vehicle entered in sales a/c now corrected
Suspense a/c
£ £
Sales 1,000 Bal b/d 3,300
Discount received 3,000 Rent 700
4,000 4,000
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is extracted at the end of each month, and a profit and loss
account and balance sheet are computed. This month, however, the trial balance did not balance, the credits exceeding debits by £1,536.
Your are asked to help and after inspection of the ledgers discover the following errors:
(i) A balance of £87 on a debtor‟s account has been omitted from the schedule of debtors, the total of which was entered as debtors in the trial
balance.
(ii) A small piece of machinery purchased for £1,200 had been written off to repairs.
(iii) The recipiets‟ side of the cashbook had been under cast by £720.
(iv) The total of one page of the sales daybook had been carried forward as £8,154, whereas the correct amount was £8,514.
(v) A credit note for £179 received from a supplier had been posted to the wrong side of his account.
(vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
(vii) Mr. Smith, whose past debts to the company had been the subject of a provision, at last paid £731 to clear his account. His personal account
has been credited but the cheque has not yet passed through the cashbook.
Solution
Suspense a/c
£ £
Opening balance 1,536.00 Debtors 87.00
Sales - under record 360.00 Cashbook under cast 720.00
Creditors error 179.00
Creditors (correct) 179.00
Cashbook: smiths debt paid 731.00
1,896.00 1,896.00
FINANCIAL ACCOUNTING 1
226 Further Adjustments to Accounts
Investigations carried out after preparing the above trial balance detected the following errors:
1. The total of the sales daybook for December 2001 was overcast by Sh 25,700.
2. On July 2001, the business purchased office equipment for Sh 40,000. These were debited to purchases account. Depreciation on the equipment
is at the rate of 10% per annum on cost and based on the period (months) of usage in the year.
3. A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor‟s account.
4. A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.
5. An amount of Sh 15,000 received from a debtor was not posted to the debtor‟s account from the cashbook.
6. Purchases daybook for October 2001 was under cast by Sh 28,000.
Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account. (6 marks)
(b) Journal entries to correct the errors (Narrations not required) (6 marks)
(c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above.
(4 marks)
(d) The adjusted net profit for the year. (4 marks)
Solution:
Adjusted Trial Balance
Sh Sh
Fixed assets – cost 832,000
Stock - 1 January 2001 148,000
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for depreciation 166,400
Purchases 733,000
Operating expenses 126,000
Provision for doubtful debts 3,800
Discounts received 5,000
Discounts allowed 5,800
Suspense account 47,800 _______
2,338,200 2,338,200
THE JOURNAL
Dr Cr
Sales 25,700
FINANCIAL ACCOUNTING 1
228 Further Adjustments to Accounts
Suspense 25,700
Creditors 8,500
Suspense 8,500
Creditors 8,500
Suspense 8,500
Suspense 900
Telephone 900
Suspense 15,000
Debtor 15,000
Suspense 2,500
Discounts allowed 2,500
Suspense 2,500
Discounts received 2,500
Purchases 28,000
Suspense 28,000
SUSPENSE ACCOUNT
2001 Sh 2001 Sh
1 Jan Bal b/d 47,800 1 Jan Sales 25,700
Telephone 900 Creditors 8,500
Debtors 15,000 Creditors 8,500
Discount allowed 2,500 Purchases 28,000
Discount received 2,500
Bal c/d 2,000 ______
70,700 70,700
Sh Sh
Net profit as per the accounts 85,800
Add
Purchases 40,000
Telephone expenses 900
Discount allowed + received 5,000 45,900
131,700
Less
Sales 25,700
Depreciation 2,000
Purchases 28,000 (55,700)
Corrected Net Profit 76,000
The cost of inventories should include all costs of purchase. (Purchase price and other taxes like import duties), costs of conversion (e.g. direct labour)
and other costs incurred in bringing the inventories into their present location and condition (carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry. In most cases either carrying out stocktaking or checking the stock
records that the firm is kept determines the value of stock at the end of the financial period. Stocktaking involves counting the number of units of
finished goods, work in progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of units available.
Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400 each respectively. At the end of year 2002, stocktaking was carried
out and the following units were available:
FINANCIAL ACCOUNTING 1
230 Further Adjustments to Accounts
Required:
Compute the cost of stock to be included in the final accounts.
Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000
Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each unit as far as the business can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number of transactions and changes in the cost price, IAS 2 on inventories
recommends the use of the following estimates:
Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000 is damaged. This stock can fetch the firm Sh 22,000 after repairs
and packaging that will cost Sh 4,000.
Required:
What value will be attached on this damaged units and the total closing stock for the final accounts purposes.
Sh
Cost 20,000
Selling price 22,000
FINANCIAL ACCOUNTING 1
232 Further Adjustments to Accounts
Repairs 4,000
NRV (22-4) 18,000
The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this damaged unit will be shown as Sh 18,000. The balance of the stock
of Sh 280,000 + 18,000 of the damaged stock will be included in the final accounts and shown together as Sh 298,000.
d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form. A work sheet has 8-10 columns and the
simple headings are as follows:
Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of balances has been extracted from his ledger as at 30 April 19X7, the
end of his most recent financial year.
£
Capital 83,887
Sales 259,870
Trade creditors 19,840
Returns out 13,407
Provision for bad debts 512
Discounts allowed 2,306
Discounts received 1,750
Purchases 135,680
Returns inwards 5,624
Carriage outwards 4,562
Drawings 18,440
Carriage inwards 11,830
Rent, rates and insurance 25,973
Heating and lighting 11,010
Postage, stationery and telephone 2,410
Advertising 5,980
Salaries and wages 38,521
Bad debts 2,008
Cash in hand 534
FINANCIAL ACCOUNTING 1
234 Further Adjustments to Accounts
Required:
MR CHAI Trial Balance Adjustments Trading account Profit & loss a/c Balance sheet
WORKSHEET £ £ £ £ £ £ £ £ £ £
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Capital 83,887 83,88
7
Sales 259,870 259,870
Trade creditors 19,840 19,84
0
Returns 13,407 13,407
outwards
Provision for B 512 223 735
debts
Discounts 2, 2,306
allowed 306
Discounts 1,750 1,750
received
Purchases 135,680 135,680
Returns Inwards 5,624 5,624
Carriage 4,562 4,562
outwards
Drawings 18,440 18,440
FINANCIAL ACCOUNTING 1
236 Further Adjustments to Accounts
25,888 25,888
Gross profit 122,239
(Balancing 122,239
figure)
291,027 291,027
Net profit
(Balancing 24,117 24,11
figure) 7
123,989 123,989 192,959 192,9
59
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In the next session we shall prepare the final accounts incorporating
these adjustments. Some adjustments will affect the format of final accounts and therefore they will look as follows:
NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£ £ £
Sales XX
Less Returns (XX)
inwards
XX
Less cost of
sales
Opening XX
stock
Purchases XX
Add carriage XX
in
XX
Less Returns (XX) XX
out
XX
Less closing (XX) (XX)
stock
Gross profit XX
Discount XX
received
Other XX
incomes
(rent,
interests,
dividends)
Profit on XX
disposal of
non-current
assets
Reduction in XX
provision for
doubtful
debts
Reduction in XX
provision for
discount
allowable
Interest on XX
overdue
debtors
balances
XX
Less
Expenses
Bad debts XX
Depreciation: XX
(eg) Plant
XX
Motor
vehicle
FINANCIAL ACCOUNTING 1
238 Further Adjustments to Accounts
Increase in XX
provision for
doubtful
debts
Increase in XX
provision for
discount
allowable
Loss on XX
disposal of
non current
assets
Loss of other XX
assets (eg)
stock
Interest XX
charged by
creditors
Other XX
expenses:
Rent
Insurance XX
Postage XX
Interest on XX (XX)
loan etc
NET XX
PROFIT
Land XX - XX
Buildings XX (XX) XX
Plant and machinery XX (XX) XX
XX XX XX
Current assets
Stock XX
Debtors XX
Less provision for (XX) XX
doubtful debts
Accrued income XX
Prepaid expenses XX
Cash at bank XX
Cash in hand XX
FINANCIAL ACCOUNTING 1
240 Further Adjustments to Accounts
Current liabilities
Bank overdraft XX
Trade creditors XX
Loan X
X
XX
Non current liabilities
Loan X
X
XX
Non current liabilities
Loan X
X
XX
Non current liabilities
FINANCIAL ACCOUNTING 1
Loan X
X
XX
242 Further Adjustments to Accounts
£ £ £
Sales 259,870
Less (5,624)
Returns
inwards
254,246
Less cost
of sales
Opening 15,654
stock
Purchases 135,680
Add 1
carriage in 1
,
8
3
0
147,510
Less (13,407) 134,103
Returns
out
Cost of 149,757
goods
available
for sale
Less (17,750) (132,00
closing 7)
stock
Gross 122,239
profit
Add: 1,750
Discount
received
123,989
Less
Expenses
Discount 2,306
allowed
Carriage 4,562
outwards
Rent, rates 19,418
and
insurance
Heating 12,370
and
lighting
Postage, 2,410
stationery
and
telephone
Advertisin 5,980
g
Salaries 38,521
and Wages
Provision
for
depreciati
on –
fixtures 12,074 99,872
and fitting
Mr Chai
Balance Sheet as at 30 April 19X7
FINANCIAL ACCOUNTING 1
244 Further Adjustments to Accounts
Non £ £ £
current Example 5.12
asset The following trial balance has been
Fixtures and 120,740 (63,020) 57,720 extracted from the ledger of Mr. Yousef, a
fittings sole trader.
Current Mr. Yousef
assets Trading and Profit and Loss Account
Stock 17,750 for the year ended 31 May 19X6.
Debtors 24,500
Less (735) 23,765
provision
for doubtful
debts
Prepayments 6,555
Cash at 4,440
bank
Cash in 5
hand 34
53,044
Current
liabilities
Creditors 19,840
Accruals 1,360 (21,200) 31,844
89,564
Capital 83,887
Add net 24,117
profit
108,004
Less (18,440)
drawings
89,564
£ £
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Rent, rates and insurance 6,622
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Provision for bad debts 130
Debtors 12,120
Creditors 6,471
Cash in hand 177
Cash at bank 1,002
Stock at at 1 June 19X5 11,927
Equipment
At cost 58,000
Accumulated depreciation 19,000
Capital ______ 53,091
216,770 216,770
FINANCIAL ACCOUNTING 1
246 Further Adjustments to Accounts
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£ £ £
Sales 138,078
Less cost of sales
Opening stock 11,927
Purchases 82,350
Carriage inwards 2,211 84,561
96,488
Less closing stock (13,551) (82,937
Gross profit 55,141
Less expenses
Carriage outwards 2,933
Rent, rates and insurance 5,952
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Increase in provision for bad debts 40
Depreciation – equipment 8,700 (49,253
Net profit 5,888
Mr. Yousef
Balance Sheet as at 31 May 19X6.
£ £ £
Non Current assets
Equipment 58,000 (27,700) 30,300
Current Assets
Stocks 13,551
Debtors 12,120
Less provision for doubtful debts (170) 11,950
Prepayments 880
Cash in hand 177
Capital 53,091
Add: Net Profit 5,888
58,979
Less Drawings (7,800)
51,179
FINANCIAL ACCOUNTING 1
248 Further Adjustments to Accounts
Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a sole trader, as at 31 May 20X9, the end of his most recent financial
year.
Herbert Howell
Trial Balance As At 31 May 20x9
Dr Cr
£ £
Property at cost 90,000
Equipment at cost 57,500
Provision for depreciation (as at 1 June 20X8)
Property 12,500
Equipment 32,500
Stock as at 1 June 20X8 27,400
Purchases 259,600
Sales 405,000
Discounts allowed 3,370
Discounts received 4,420
Wages and salaries 52,360
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,800
Trade debtors 46,200
Trade creditors 33,600
Provision for bad debts 280
Cash on hand 151
Bank overdraft 14,500
Drawings 28,930
13% loan 12,000
Capital, as at 1 June 20X8 ______ 98,101
612,901 612,901
Required:
Prepare Mr. Howell‟s trading and profit and loss account for the year ended 31 May 20X9 and his balance sheet as at 31 May 20X9.
(20 marks)
Solution:
£ £
Sales 405,000
Less cost of sales
Opening stock 27,400
Purchases 258,560
285,960
Less closing stock (25,900) (260,060)
Gross profit 144,940
Discounts received 4,420
Decrease in provision for bad debts ____49
149,409
Less expenses
Depreciation: Property 900
Equipment 8,625
Discounts allowed 3,370
Wages and salaries 52,500
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,500 (112,485)
NET PROFIT 86,924
Herbert Howell
FINANCIAL ACCOUNTING 1
250 Further Adjustments to Accounts
Workings:
1) Depreciation for:
Property 1% X 90,000 = 900
Equipment 15% X 57,500 = 8,625
280 – 231= 49
FINANCIAL ACCOUNTING 1
252 Further Adjustments to Accounts
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March 2001
Sales 378,500.00
Discount Received 2,400.00
Rent Received 7,500.00
Returns outwards 7,700.00
Creditors 18,700.00
Bank Overdraft 30,000.00
Capital 287,500.00
Purchases 261,700.00
Salaries and Wages 45,700.00
Office expenses 8,400.00
Insurance premiums 3,100.00
Electricity 1,600.00
Stationery 6,200.00
Advertising 8,400.00
Telephone 2,100.00
Business Rates 7,500.00
Discounts allowed 600.00
Returns Inwards 4,100.00
Stocks as at 1 April 2000 120,600.00
Warehouse, shop and office 210,000.00
Fixtures and fittings 12,800.00
Debtors 13,000.00
Cash in till 500.00
Drawings 26,000.00
Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March 2001 and balance sheet as at that date.
FINANCIAL ACCOUNTING 1
254 Further Adjustments to Accounts
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.
Required
Prepare Donald Brown‟s trading and profit and loss account for the year ended 31 December 20X0 and his balance sheet at that date.
QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a sole trader.
Brenda Bailey
Trial Balance As At 30 June 20x9
Dr Cr
£ £
Sales 427,726
Purchases 302,419
Carriage inwards 476
Carriage outwards 829
Wages and salaries 64,210
Rent and rates 12,466
Heat and light 4,757
Stock at 1 July 20X8 15,310
Drawings 21,600
Equipment at cost 102,000
Motor vehicles at cost 43,270
Provision for depreciation:
Equipment 22,250
Motor vehicles 8,920
FINANCIAL ACCOUNTING 1
256 Further Adjustments to Accounts
Debtors 50,633
Creditors 41,792
Bank 3,295
Sundry expenses 8,426
Cash 477
Capital ______ 122,890
626,873 626,873
Required
Prepare Brenda Bailey‟s trading and profit and loss account for the year ended 30June 20X9 and her balance sheet at that date.
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for December 19X9. The statement showed the following.
MIDWEST BANK
FINANCIAL ACCOUNTING 1
258 Further Adjustments to Accounts
CASH BOOK
19x8 $ 19x8 Cheque $
No
Dec 1 Balance b/d 1,862 Dec 1 Electricity 243
864
Dec 4 J Shannon 212 Dec 2 P Simpson 865 307
Dec 9 M Lipton 185 Dec 5 D Underhill 866 174
Dec 19 G Hurst 118 Dec 6 A Young 867 17
Dec 26 M Evans 47 Dec 10 T Unwin 868 95
Dec 27 J Smith 279 Dec 14 B Oliver 869 71
Dec 29 V Owen 98 Dec 16 Rent 870 161
Dec 30 K Walters 134 Dec 20 M Peters 871 25
Dec 21 L Philips 872 37
Dec 22 W Hamilton 873 12
Dec 31 Balance c/d 1,793
_____ 2,935
2,935
Required
a) Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
b) Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON SIX
There are 4 main approaches in preparing final accounts where there are insufficient records.
FINANCIAL ACCOUNTING 1
260 Other Aspects of Final Accounts
Or where there are no non current liabilities then this optional formula can be used
Example: 6.1
A sole trader‟s capital position is as follows:
31 December
19X2 19X3
£ £
Motor vehicle:
Cost 7,500 7,500
Depreciation 3,000 4,500
4,500 3,000
Stock 2,960 3,450
Debtors 1,150 2,060
Bank 925 2,125
Cash __263 ___54
9,798 10,689
Creditors 2,860 3,340
Net assets 6,938 7,349
He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the year.
Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets
= £12,911
FINANCIAL ACCOUNTING 1
262 Other Aspects of Final Accounts
E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the Gross Profit Margin will be:
= 25 x 100
100
= 25%
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (£100,000)
= £25,000
2) Mark up
= 25 x 100
75
= 33.33%
N/B: 75 = 100 – 25
Cost = selling price – gross profit
3) Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
FINANCIAL ACCOUNTING 1
264 Other Aspects of Final Accounts
= 11.6 times
Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001 6,000
Purchases 54,000
Jones‟s mark-up is 50% on cost of goods sold. His average stock during the year was £12,000. Draw up a trading and profit and loss account for the
year ended 30 June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a net profit on sales of 10%.
Solution
= 18,000
Example 6.3
W White‟s business has a rate of turnover of 7 times. Average stock is £12,600. Trade discount (i.e. margin allowed) is 33¼% off all selling prices.
Expenses are 66 ¾% of gross profit.
FINANCIAL ACCOUNTING 1
266 Other Aspects of Final Accounts
Solution:
Profit schedule
£
Turnover 132,300
Cost of goods sold 88,200
Gross profit 44,100
Expenses (29,400)
Net profit 14,700
7 = Cost of Sales
12,600
(c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook for both cash in hand and cash at bank can be prepared
in confirmation of deposits and payments made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income received to the relevant income accounts, expenses to relevant expense
accounts and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit sales and cash purchases or credit purchases.
1) Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e. the cashbook (for both cash in hand and bank), sales ledger control
account and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank payments and receipts during the year to 31 December 19X8 were as
follows:
FINANCIAL ACCOUNTING 1
268 Other Aspects of Final Accounts
Reciepts Payments
£ £
Balance 1 Jan 19X8 572 Purchases 10,007
Cheques for sales 13,179 Expenses 2,950
Cash banked 14,005 Drawings 11,250
Balance 31 Dec 19X8 3,751 Delivery van 7,300
31,507 31,507
CURRENT LIABILITIES
Creditors (1,250)
Net Assets 3,884
Capital 3,884
FINANCIAL ACCOUNTING 1
270 Other Aspects of Final Accounts
The capital invested at any point of time in a business by the owner is represented by the difference between the assets and liabilities at that
time.
The difference between the capital at the end and the capital at the beginning of the trading period represents the trading profit made during
that period, unless there were withdrawals or investments of additional capital.
Hobbs
Trading and Profit and Loss Account for the year ending 31 December 19X8
£ £
Sales 29,699
Less cost of goods sold:
Opening stock 2,650
Add purchases 12,027
14,677
Less closing stock (2,990) 11,687
GROSS PROFIT 18,012
Less Expenses:
Expenses (375 + 2,950) 3,325
Depreciation 1,460 (4,785)
FINANCIAL ACCOUNTING 1
272 Other Aspects of Final Accounts
Hobbs
Balance Sheet as at 31 December 19X8
£ £ £
Fixed Assets Cost Depreciation NBV
Delivery van 7,300 1,460 5,840
Current Assets
Stock 2,990
Debtors 2,070
Cash ___65
5,125
Less current liabilities
Creditors 1,420
Bank overdraft 3,751 5,171 __46
5,794
Financed by:
Capital 3,884
3,884
Add net profit 13,22
7
17,111
Less drawings (11,250 + 67) 11,317
5,794
1. At the commencement of business on 1 April 2000, he deposited Sh 1,200,000 into business bank account. On the same day he brought into the
firm his pickup and estimated that it was worth Sh 660,000 and then that from 1 April 2000 it will have useful life of three years.
2. To increase his working capital he borrowed Sh 400,000 at 15% interest per annum on 1 July 2000 from his sister but no interest has yet been paid.
3. On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per annum.
4. He had drawn Sh 18,000 per week from the business account for private use during the year.
5. He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of stock was retained in the workshop on 31 March 2001. He also spent
Sh 960,000 on the purchase of some equipment at the commencement of the business which he estimates will last him five years.
6. Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the remaining two months were estimated to be Sh 48,000. Motor
vehicle expenses were Sh 182,000 while general expenses amounted to Sh 270,000 for the year. Insurance premium for the year to 30 June 2001
was Sh 160,000. All these expenses have been paid by cheque.
7. Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
8. Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had been received by 31 March 2001. Debt totaling to Sh 17,000 were
abandoned during the year as bad. Other customers for jobs too small to invoice have paid Sh 726,000 in cash for work done of which Sh 560,000
was banked. Kimeu used Sh 75,000 of the difference to pay for his family‟s foodstuff, bought Kenya Charity Sweepstake tickets worth 24,000 and
Sally used the rest on general expenses except for Sh 30,100 which was left in the office on 31 March 2001.
9. You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.
Required:
(a) Profit and loss account for the year ended 31 March 2001. (10 marks)
(b) Balance sheet as at 31 March 2001. (10 marks)
(Total: 20 marks)
Solution:
Cash book – Bank
Sh Sh
Capital 1,200,000 Salary 120,000
Loan 400,000 Drawings 936,000
Debtors 5,080,000 Timber 1,960,000
Cash 560,000 Equipment 960,000
Electricity 240,000
Motor vehicle expenses 182,000
General expenses 270,000
Insurance 160,000
________ Bal c/d 1,812,000
7,240,000 7,240,000
Capital
Sh Sh
Bank 1,200,000
Bal c/d 1,860,000 Pick up 660,000
1,860,000 1,860,000
FINANCIAL ACCOUNTING 1
274 Other Aspects of Final Accounts
Debtors
Sh Sh
Sales 6,178,000 Bank 5,080,000
Bad debts 17,000
________ Bal c/d 1,081,000
6,178,000 6,178,000
Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh Sh
Sales (cash + credit) 6,904,000
Less expenses
Timber used (1,960,000 – 158,000) 1,802,000
Depreciation – motor vehicle 220,000
- Equipment 192,000
Loan interest 45,000
Salary 720,000
Electricity bills 288,000
Motor vehicle expenses 182,000
General expenses 306,900
Insurance premium 120,000
Rates 27,000
Bad debts 17,000
Accountancy fees 55,000 (3,974,900)
Net profit 2,929,100
FINANCIAL ACCOUNTING 1
276 Other Aspects of Final Accounts
Kimeu
Balance Sheet as at 31 March 2001
Non current Asset Sh Sh Sh
Equipment 960,000 192,000 768,000
Motor vehicle 660,000 220,000 440,000
1,620,000 412,000 1,208,000
Current Assets
Stock 158,000
Debtors 108,000
Insurance – prepayments 40,000
Cash at bank 181,200
Cash in hand 30,000
3,121,100
Less current liabilities
Accruals 175,000 2,946,100
4,154,100
Capital 1,860,000
Add net profit 2,929,100
4,789,100
Less drawings 1,035,000
3,754,100
Non current liability
Loan 15% 400,000
4,154,100
Sh Sh
Payments for goods 4,747,500 Takings 5,465,000
Payments for expenses 565,000
Profits 152,500 ________
5,465,000 5,465,000
Abi instructs you to examine his records and prepare accounts. From your examination of the records and interview with your client, you ascertain the
following information:
1. The takings are kept in a drawer under the counter; at the end of each day the cash is counted and recorded on a scrap of paper; at irregular
intervals Mrs. Abi transcribes the figures into a notebook; a batch of slips of paper was inadvertently destroyed before the figures had been written
into the notebook, but Mr. And Mrs. Abi carefully estimated their takings for that period, and the estimated figure is included in the total of Sh.
5,465,000.
2. Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500 per week with cash taken from the drawer. His winnings totaled
Sh. 29,500.
4. Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings included Sh 12,500 recovered in respect of an old debt abandoned
in the previous year.
5. Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52 weeks in a year; the rent is included in expenses of Sh 565,000. The
living accommodation comprises one-third of the building.
6. The total expenses also include:
7. Mr. Abi takes Sh. 5,000 per week from the business for his wife‟s personal expenses. This excludes the amount indicated in note 8.
8. Mr. Abi draws Sh. 750 per week for cigarettes and beer.
FINANCIAL ACCOUNTING 1
278 Other Aspects of Final Accounts
9. During the year, Mr. Abi bought a secondhand car (not for use in the business) from a friend; the price agreed was Sh. 175,000, but as the friend
owed Mr. Abi Sh. 33,500 for goods supplied from the business, the difference was settled by cheque.
10. An insurance policy for Mr. Abi‟s life matured and realized Sh. 320,500.
11. Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored and the friend is repaying the Sh. 50,000 by installments. He had
paid Sh. 20,000 by 30 June 1994.
12. Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh. 55,000 for income tax.
13. You are to provide Sh. 21,000 for accountancy fees.
N.B. All receipts and payments of Mr. Abi are made through his business account.
Required:
(a) Mr. Abi‟s balance sheet for the business at 30 June 1993. (4 marks)
(b) Mr. Abi‟s profit and loss account for the year ended 30 June 1994. (12 marks)
(c) Mr. Abi‟s balance sheet for the business at 30 June 1994. (6 marks)
(Total: 20 marks)
Solution:
Abi
Balance Sheet as at 30 June 1993
Current Assets Sh Sh
Stock 97,500
Debtors 229,000
Cash at bank 78,000
Cash in hand 22,500
1,304,500
Current liabilities
Creditors (139,500) 1,165,000
1,165,000
Capital 1,165,000
Cash at Bank
Sh Sh
Balance b/d 78,000 Drawings – personal expense for wife 260,000
Sales ledger control a/c 12,500 Drawings – cigarettes and beer 39,000
Insurance (drawings) 320,500 Expenses 565,000
Drawings 50,000 Drawings – second hand car 141,500
Drawings 20,000 Cash in hand 6,500
Debtors 5,591,000 Drawings – friend 50,000
Creditors 4,747,500
Dishonored cheque – drawings 50,000
Drawings 48,000
Income tax 55,000
________ Balance c/d 109,500
6,072,000 6,072,000
Cash in Hand
Sh Sh
FINANCIAL ACCOUNTING 1
280 Other Aspects of Final Accounts
Expenses
Total Business Private
Rent 78,000 52,000 26,000
Motor running expenses 17,500 - 17,500
Decoration 30,000 20,000 10,000
Alterations 80,000 80,000
Other expenses 359,500 359,500 _____
565,000 532,500 53,500
Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£ £
Sales 5,819,000
Less cost of sales
Opening stock 975,000
Purchases 4,729,500
57,040,500
Less closing stock 950,000 4,754,500
Gross profit 1,064,500
Less expenses
Rent 52,000
Decoration 20,000
Alterations 80,000
Other expenses 359,500
Bad debts 165,500
Accountancy fees 21,000 (698,000)
Net profit 366,500
Abi
Balance Sheet as at 30 June 1994
Cost Depreciation Book Value
Current Assets: £ £ £
Stock 950,000
Debtors 245,500
Cash at bank 109,500
Cash in hand 43,500
1,348,500
Current Liabilities
Creditors 121,500
Accruals 21,000 (142,500) 1,206,000
Capital 1,165,000
Add net profit 366,500
1,531,500
Less drawings (325,500)
1,206,000
FINANCIAL ACCOUNTING 1
282 Other Aspects of Final Accounts
Example:
1. Instead of a cashbook, the clubs will maintain a receipts and payments which has similar entries to those of a cashbook.
2. Instead of profit and loss account, we have an income and expenditure account.
3. Because the club is not formed by any one owner (has no owner), it is funded by members‟ contributions, donations, income from investments to
get an accumulated fund instead of capital.
From the income and expenditure account, if the incomes are more than the expenditures for the period, then the club has a surplus and not a net
profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of the clubs activities and incase a firm has a trading activity, then in
addition to the income and expenditure account and the balance sheet, prepare a Bar Trading Account.
Incomes £ £
Subscriptions XX
Donations XX
XX
Expenditure
Depreciation XX
FINANCIAL ACCOUNTING 1
284 Other Aspects of Final Accounts
NAME
BALANCE SHEET AS AT 31 DECEMBER ……
Non current Assets £ £ £
Buildings XX (XX) XX
Fixtures, fittings and equipment XX (XX) XX
Motor vehicle XX (XX) XX
XX (XX) XX
Investments XX
Current Assets
Stocks XX
Debtors XX
Prepayments and accrued income XX
Cash at bank/hand (receipts + XX
payments)
XX
Current liabilities
Creditors XX
Accrued expenses and prepaid income XX
Bank overdraft XX (XX) XX
XX
Accumulated fund balance b/f XX
Add/less surplus / deficit XX/(XX)
Other funds
Life membership fund XX
Building fund XX
Education fund XX XX
XX
1. Subscriptions:
These are the amounts received by the club from the members to renew their membership. It is often paid on an annual basis.
It is income for the club and therefore reported in the income and expenditure account.
FINANCIAL ACCOUNTING 1
286 Other Aspects of Final Accounts
Depending on the policy of a club, any subscriptions due but not received are shown as accrued income (debtors for subscriptions) in the balance
sheet.
Any amounts prepaid are shown as prepaid (creditors for subscriptions).
Some clubs will not report subscriptions as income until it is received in form of cash.
If the club is investing with no specific intention (i.e a general investment) then income from this investment should be reported in the income and
expenditure account.
If the investment is for a specific purpose and relates to a specific fund (e.g building fund) it will not be reported in the income and expenditure
account but credited directly to the fund.
3. Other funds
These are funds set up for a specific purpose and not general. They will be shown together with the accumulated fund.
Any incomes relating to these funds, will be credited directly to the funds and any expenses will be taken off from these funds e.g. building fund,
education fund.
i. The full amount is reported in the Income and Expenditure account in the year it is received and therefore no balance is retained in the life
membership account.
ii. The amount is shown separately in the life membership fund with no transfer in the Income and Expenditure account and hence no balance
in the life membership account.
iii. To transfer some amounts from the life membership funds to the income and expenditure account over the expected life of membership to
the club.
Example 6.7
The following is the receipts and payments account of the Friendship Club for the year ended 31 December 19X1:
£ £
Balance at bank
2) On 31 December 19X0, the club held investments which cost £500. During the year ended 31 December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club purchased additional furniture at a cost of £520. Depreciation
of all furniture is to be provided for at the rate of 10% per annum.
Required:
(a) Prepare an income and expenditure account for the year ended 31 December 19X1.
(b) Prepare a balance sheet at that date.
Solution:
FINANCIAL ACCOUNTING 1
288 Other Aspects of Final Accounts
Friendship Club
Accumulated Fund As at 1.1.19X1
Assets £ £
Stock 272
Subscriptions due 25
Insurance prepaid 5
Investments 500
Furniture 300
Balance at bank 102
1,204
Liabilities
Creditors 306
Rent due 18
Heating and lighting expenses 16 (340)
Accumulated fund 864
Creditors
£ £
Receipts and payments 4,434 Balance b/f 306
Balance c/d 358 Purchases 4,486
4,792 4,792
Subscriptions
£ £
Balance b/d 25 Receipts & payments 365
Income & expenditure 345
Balance c/d 35 Balance c/d 40
405 405
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
£ £
Sales 5,227
Purchases 4,486
4,758
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£ £
Profit from bar trading 784
Entrance fees 42
Subscriptions 345
Profit from sale of investments 250
1,421
Expenditure
Wages 416
Rent 204
Heating and lighting 131
Postage and stationery 33
Insurance 16
General expenses 46
FINANCIAL ACCOUNTING 1
290 Other Aspects of Final Accounts
Friendship Club
Balance Sheet as at 31 December 19X1
Non current Assets £ £ £
Furniture 820 (56) 764
Current Assets
Stock 315
Subscriptions due 40
Prepaid expense 7
Cash at bank 775
1,137
Current liabilities
Creditors 398
Prepaid subscriptions 35
Accrued expenses 55
Creditors fixtures 70 (518) 619
1,383
Accumulated fund b/f 864
Add surplus 519
1,383
FINANCIAL ACCOUNTING 1
292 Other Aspects of Final Accounts
Receipts Payments
Sh Sh
Transport 248,000
Investments 1,500,000
4,561,000 4,561,000
Additional information:
Required:
(a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
(b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
Solution:
Equipment 690,000
FINANCIAL ACCOUNTING 1
294 Other Aspects of Final Accounts
5,180,000
Liabilities
5,027,000
Subscriptions
2001 Sh 2001 £
Balance b/d 300,000 Balance b/f 85,000
Receipts and payments 45,000 Receipt and payment 2,493,000
Income & expenditure 2,465,000 Income & expenditure 51,000
Balance c/f 194,000 Balance c/f 375,000
3,004,000 3,004,000
Incomes Sh
Profit from trading account 182,000
Subscriptions 2,465,000
Dinner dance 723,000
Investment income 400,000
Profit on sale of investments 125,000
3,895,000
FINANCIAL ACCOUNTING 1
296 Other Aspects of Final Accounts
Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10% has been earned on the deposit account. No changes have taken
place all year in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the close of the year although the wine had been included in the bar stock
valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000 (6 marks)
(b) An income and expenditure account for the year ended 30 September 2000 (8 marks)
(c) A balance sheet as at 30 September 2000 (6 marks)
(Total: 20 marks)
FINANCIAL ACCOUNTING 1
298 Other Aspects of Final Accounts
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September 2000
Sh Sh
Sales 7,674,000
Less cost of sales
Opening stock 473,600
Add purchases 4,450,800
4,924,400
Less closing stock
Profit to the income and expenditure (642,800) (4,281,600)
3,392,400
Income Sh Sh
Profit on trading account 992,400
Interest on bank deposit account 100,000
Subscriptions 1,450,000
Donations 108,000
Rental of rooms 495,000
3,146,200
Expenditure
Lecturer‟s fees 920,000
Depreciation on furniture and fitting 194,000
Equipment 19,000
Lecturer‟s travel and accommodation exp. 358,000
Camera repairs 17,000
Rates and water 277,000
Lighting and heating 867,200
Caretakers wages 880,000
Interest on loan 64,000
Provision for subscription 43,600 (3,139,800)
Surplus 6,400
FINANCIAL ACCOUNTING 1
300 Other Aspects of Final Accounts
(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it is cheaper to produce the goods rather than
buy).
Due to additional costs involved in the production process, additional information is reported in the final accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)
FINANCIAL ACCOUNTING 1
302 Other Aspects of Final Accounts
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December
£ £
Raw Materials
Opening stock of raw materials XX
Purchases of raw materials XX
Add carriage inwards XX
XX
Less returns outwards (XX) XX
Cost of raw materials available for use XX
Less closing stock of raw materials (XX)
Raw materials consumed XX
Direct labour (factory wages) XX
Direct expenses XX
Prime cost XX
Factory overheads
Salary to factory manager XX
Depreciation on – Plant and machinery XX
- Factory buildings XX
Other expenses – Factory power XX
Lighting and heating XX
Water XX
Cleaners wages XX XX
Total cost of production XX
Add: opening Work In Progress XX
Less: closing Work In Progress (XX) XX
Factory cost of production (cost of finished goods) XX Note 1
FACTORY PROFIT XX
Finished goods at a transfer price XX Note 2
Sales XX
Less returns inwards (XX)
XX
Less cost of sales
Opening stock – finished goods XX
For the balance sheet, the format is the same for all the assets and liabilities except for the current assets section whereby the stock at the end of the
period should be shown for each type of stock as per this format:
Current Assets £ £
Stock: raw materials XX
Work in progress XX
Finished goods XX XX
Note 1: This represents the total costs of all the units produced during the period and therefore will be taken to the trading account as the goods are
transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of production, then this generates a factory profit. The
goods will be shown in the trading account at the transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries (not factory managers), legal and accounting
fees, depreciation of furniture and fixtures and equipment not used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.
FINANCIAL ACCOUNTING 1
304 Other Aspects of Final Accounts
Example 6.10
B spikes
Trial Balance as on 31 December 2002
Dr Cr
Stock of raw materials 1.1.2002 21,000
Stock of finished goods 1.1.2002 38,900
Work in progress 1.1.2002 13,500
Wages(direct £180,000: factory indirect£145,000) 325,000
Royalties 7,000
Carriage inwards (on raw materials) 3,500
Purchases of raw materials 370,000
Productive machinery (cost £280,000) 230,000
Accounting machinery (cost £20,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Administrative salaries 44,000
Sales representatives‟ salaries 30,000
Commission on sales 11,500
Rent 12,000
Insurance 4,200
General administration expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Sales 1000,000
Debtors and creditors 142,300 125,000
Bank 56,800
Cash 1,500
Drawings 20,000
Capital as at 1.1.2002 ______ 29,680
1,421,800 1,421,800
Notes at 31.12.2002
1. Stock of raw materials £24,000, stock of finished goods £40,000, work in progress £15,000.
FINANCIAL ACCOUNTING 1
306 Other Aspects of Final Accounts
2. Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6 th.
3. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.
Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002
Raw Materials £ £
Opening Stock of raw materials 21,000
Purchases 370,000
Carriage inwards on raw materials 3,500 373,500
394,500
Less: closing stock of raw materials (24,000)
Raw materials consumed 370,500
Direct wages 180,000
PRIME COST 550,500
Factory Overheads
Wages 145,000
Royalties 7,000
Depreciation: productive machinery 28,000
General factory expenses 31,000
Lighting( 5/6 x 7,500) 6,250
Factory power 13,700
Rent(5/6 x 12,000) 10,000
Insurance( 5/6 x 4,200 ) 3,500 24,4,450
Total cost of production 794,950
Add: opening work in progress 13,500
808,450
Less: closing work in progress (15,000)
Factory cost production per finished goods 793,450
Sales 1,000,000
Less cost of sales
Opening stock of finished goods 38,900
Factory cost of production 793,450
832,350
Less closing stock of finished goods (40,000) 792,350
Gross profit 207,650
Expenses
Accounting machinery – depreciation 2,000
FINANCIAL ACCOUNTING 1
308 Other Aspects of Final Accounts
B Spikes
Balance Sheet as at 31 December 2002
386,600
Less drawings (20,000)
366,600
FINANCIAL ACCOUNTING 1
310 Other Aspects of Final Accounts
Dr Cr
Sh Sh
Capital at 1 February 1985 171,120
Accounts payable 86,000
Bank and cash balance 5,400
Accounts receivable 92,000
Drawings 60,000
Administration expenses 150,360
Advertising expenses 12,000
Factory direct wages 60,000
Factory indirect wages 24,000
Factory power 36,000
Furniture and fittings (all offices) 18,400
Heat and light 16,000
Plant and equipment 276,800
Motor vehicle (used by salesmen) 144,000
Plant hire 4,000
Provision for bad debts 3,200
Provision for depreciation 1 February 1985:
Furniture and fittings 9,200
Plant and equipment 138,400
Motor vehicle 24,000
Raw material purchases 228,000
Rent rates 20,000
Sales 829,440
Selling and distribution expenses 66,400
Inventories at cost, 1 February 1985:
Raw materials 8,000
Work in progress 16,000
Finished goods 24,000 _______
1,261,360 1,261,360
There was also prepayment of Sh. 800 for salesmen‟s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:
(iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates of 20%, 25% and 10% per annum
respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi‟s manufacturing, trading and profit and loss account for the year ended 31 January 1986 and a balance
sheet as at that date. (22 marks)
Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986
Direct materials Sh Sh
Opening stock of raw materials 8,000
Add: purchases of raw materials 228,000
236,000
Less: closing stock of raw materials (15,200)
Raw materials consumed 220,800
Factory direct wages 60,000
PRIME COST 280,800
Factory overheads
Factory indirect wages 24,000
Factory power 37,600
FINANCIAL ACCOUNTING 1
312 Other Aspects of Final Accounts
Bibi Maridadi
Balance Sheet as at 31 January 1986
COST DEPRECIATION NET BOOK
VALUE
Non current Assets £ £ £
Plant and equipment 276,800 (193,760) 83,040
Furniture and fittings 18,400 (11,040) 7,360
Motor vehicle 144,000 (60,000) 84,000
439,200 (264,800) 174,400
Current Assets
Stock: Raw materials 15,200
Work in progress 30,400
Finished goods 45,600 91,200
Debtors 92,000
Less: provision for doubtful debts (4,600) 87,400
Prepayments 800
Cash in hand and bank 5,400
184,800
Current liabilities
Creditors 86,000
Accruals 5,600 (91,600) 93,200
267,600
Capital 171,120
Add net profit 156,480
327,600
Less drawings (60,000)
267,600
FINANCIAL ACCOUNTING 1
314 Other Aspects of Final Accounts
Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
£ £
Gross profit X
Add: factory profit X
Add: other incomes X
Add: decrease in UPCS X
X
Less expenses
Other expenses (X)
Net profit X
Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening stock of finished goods for the period was
valued at Sh. 100,000. (The marked up cost) The closing stock at the end of the financial period was Sh.160,000.
UPCS
Balance b/f 16,667
Balance c/d 26,667 Profit and loss a/c 10,000
26,667 26,667
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316 Other Aspects of Final Accounts
Current Assets Sh Sh
Stock:
Raw materials X
Work in progress X
Finished goods 160,000
Less: UPCS (26,667) 133,333
Some organizations have various departments carrying out trade and therefore the profitability of each department needs to be established. For each
department, trading, profit and loss account should be prepared. The final accounts will be very important for the management to assess the
performance of each department.
The expenses in relation to a specific department should be charged in the Profit and Loss account for that department. The accounts will be
represented in columnar form and the format will be as follows: (Assume a firm has departments A and B).
Name
Trading Profit and Loss account for the year ended 31 December
The balance sheet will reflect the position of the whole organization and therefore a departmental balance sheet is not required.
When departments in a firm are sharing resources, then the various expenses need to be apportioned between or among the different departments e.g.
if the departments are sharing a building, then rent expense should be apportioned among the departments.
The following guidelines can be followed in apportioning the expenses among the departments.
2) Depreciation, insurance and maintenance Cost or net book value of the equipment in
of equipment each department.
Example 6.12
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318 Other Aspects of Final Accounts
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and children‟s games and toys. For the purposes of his accounts, he wishes
the business to be divided into two departments:
The following balances have been extracted from his nominal ledger at 31 March 19X9:
Dr Cr
Sales Department A 15,000
Sales Department B 10,000
Stocks Department A, 1 April 19X8 250
Stocks Department B, 1 April 19x8 200
Purchases Department A 11,800
Purchases Department B 8,200
Wages of sales assistants Department A 1,000
Wages of sales assistants Department B 750
Newspaper delivery wages 150
General office salaries 750
Rates 130
Fire insurance – buildings 50
Lighting and air conditioning 120
Repairs to premises 25
Internal telephone 25
Cleaning 30
Accountancy and audit charges 120
General office expenses 60
25,000 25,000
Department A £300
Department B £150
The proportion of the total floor area occupied by each department was:
Prepare J Spratt‟s trading and profit and loss account for the year ended 31 March 19X9, apportioning the overhead expenses, where necessary, to show
the Department profit or loss.
Area - Rates, Fire insurance, Lighting and air conditioning, Repairs, Telephone, Cleaning:
FINANCIAL ACCOUNTING 1
320 Other Aspects of Final Accounts
Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
Less expenses
Wages 1,000 750 1,750
Newspaper delivery wages 150 - 150
General office salaries 450 300 750
Rates 26 104 130
Fire insurance – buildings 10 40 50
Lighting and air-conditioning 24 96 120
Repairs to premises 5 20 25
Internal telephone 5 20 25
Cleaning 6 24 30
Accountancy or audit charges 72 48 120
General office expenses 36 (1,784) 24 (1,426) 60 (3,210)
NET PROFIT 1,466 324 1,790
Workings:
5) Repairs: A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
FINANCIAL ACCOUNTING 1
322 Other Aspects of Final Accounts
Interdepartmental Trading
A department may buy goods from another department in the same firm and therefore the departments trade with one another. Example, in 4.16
above, department A sells goods to Department B. (Department B is buying from department A). Interdepartmental sales and purchases should be
excluded from the total sales and total purchases of the whole firm. If we assume that A sold goods to B amounting to £1,000 and this figure is
included in sales of A and purchases of B, the trading account for the whole firm will be as follows (other items will remain the same):
£ £
Sales 24,000
Less cost of sales
Opening stock 450
Purchases 19,000
19,450
Less closing stock (450) (19,000)
Gross profit 5,000
Managers Commission
A commission based on the net profit made in each department may reward managers of each department.
The commission is normally a percentage of the net profit but it may be a percentage on the net profit before or after charging the commission.
If we assume in example 4.16 that the managers in each department is paid a commission of 5%, before charging such commission, the commission will
be as follows:
Assume the commission is 5% of the net profit after charging such commission:
Note:
If we use percentage for each commission assuming a 5% rate, the commission will be computed as follows:
REINFORCEMENT QUESTIONS
QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31 December 19X6:
£ £
Amounts credited by bank 32,050 Balance at 1 January 19X6 892
Payments to trade creditors 27,380
Rent and rates 475
Fixtures 100
Lighting and heating 210
General expenses 800
Loan interest 120
Drawings 900
Customers‟ cheques dishonoured 180
_____ Balance at 31 December 19X6 993
32,050 32,050
1. Trading receipts consisted partly of cash and partly of cheques. During the year, Dare had paid, out of his takings, wages for part-time staff
amounting to £2,914 and sundry expenditure of £140. He retained between £2 and £5 per week pocket money and maintained a balance of £20
FINANCIAL ACCOUNTING 1
324 Other Aspects of Final Accounts
in the till for change. The balance of his takings, together with cheques amounting to £250, which he had cashed out of his takings for the
convenience of certain friends, was paid into the bank.
2. Cheques drawn payable to trade creditors, but not presented at 1 January 19X6, amounted to £280 and at 31December 19X6 to £320.
3. All dishonoured cheques were re-presented and honoured during the year.
4. The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000 some years ago at a nominal rate of interest of 3% per annum. The
interest was duly paid half-yearly on 31st March and 30 September, and the loan was still outstanding at the end of the year.
5. Discounts allowed by trade creditors amounted to £480 and those allowed to debtors were £520.
1 January 31 December
£ £
Stocks 4,500 5,800
Trade debtors 2,800 3,200 (including a bad debt of £200 to
be written off)
Accrued general expenses 240 190
Rates paid in advance 40 50
Fixtures valued at 2,800 2,550 (including those purchased during
the year)
Trade creditors 1,800 2,200
Creditors for heating and
lighting 80 70
QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social Club.
The summarized balance sheet on 31.12.94 as prepared by the previous bookkeeper contained the following items. All figures are in £s.
Assets
Heating oil for clubhouse 1,000
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326 Other Aspects of Final Accounts
The bank account summary for the year to 31.12.95 contained the following items:
Receipts:
Subscriptions 11,000
Bankings – bar and sale 20,000
Sale of sports ware 5,000
Hire of sports ware 3,000
Interest on deposit account 800
Payments
Rent and repairs of clubhouse 6,000
Heating oil 4,000
Sports ware 4,500
Grounds person 10,000
Bar and café purchases 9,000
Transfer to deposit account 6,000
You discover that the subscriptions due figure as at 31.12.94 was arrived at as follows:
Subscriptions due for more than 12 months should be written off with effect from 1.1.95
2/3 rds
of the sportswear purchases made in 1995 had been added to stock of new sportswear in the figures given in the list of assets above, and 1/3 had
been added directly to the stock of used sportswear for hire.
Half of the resulting „new sportswear for sale at cost‟ at 31.12.95, to transfer these older items into the stock of used sportswear, at a valuation of 25%
of their original cost.
No cash balances are held at 31.12.95. The equipment for the grounds person is to be depreciated at 10% per annum, on cost.
Required:
Prepare income and expenditure account and balance sheet for the AB Sports club for 1995, in a form suitable for circulation to members. The
information given should be as complete and informative as possible within the limits of the information given to you. All workings must be
submitted. (23 marks)
QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the name of Chero Hardware. Most goods in which he trades are
purchased from various suppliers in a finished form. In addition, a separate department of the firm manufactures various types of lampshades from
purchased raw materials. When finished, the lampshades are transferred to the shop at an agreed transfer price for sale. No lampshades are sold other
than through the shop.
The firm‟s Accounts Assistant presents you with the following trial balance at 30 June 1988:
Sh Sh
Capital account – Cherono 740,000
Drawings – Cherono 95,000
Long term loan (interest at 15% p.a) 240,000
Fixtures and fittings at cost 900,000
Accumulated depreciation at 1 July 1987 350,000
Motor vehicle at cost 208,000
Accumulated depreciation at 1 July 1987 60,000
FINANCIAL ACCOUNTING 1
328 Other Aspects of Final Accounts
Additional Information:
(a) The agreed transfer price for lampshades produced was Sh. 1,000,000. The workshop produced 50,000 lampshades during the year.
(b) Wages include those of the lampshades making employee who has been paid Sh. 50,000 for the year. In addition, she is entitled to a
commission on the annual profit of her department of 10% p.a. after charging such commission. Shop assistants‟ wages were Sh. 108,000.
(c) The apportionment of rent and rates; and water and electricity to the lampshades is 25% of the total.
Required:
(a) Prepare a manufacturing, trading and profit and loss accounts for the year ended 30 June 1988, disclosing clearly (i) the profit earned by the
lampshades-making department and (ii) the gross profit earned by the shop.
(b) Prepare a balance sheet as at 30 June 1988.
QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The financial year of the club, which had been formed to provide training
facilities for both field and track event athletes, had ended two days previously on 31 October 1983. An extraordinary general meeting was convened
for the purpose of appointing a new treasurer whose task it would be to prepare the annual accounts for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an elementary knowledge of bookkeeping, soon found himself in
difficulty.
FINANCIAL ACCOUNTING 1
330 Other Aspects of Final Accounts
He sought your assistance, which you agreed to give. During your conversation he said, „The previous treasurer maintained a Cash and Bank account.
I have summarized the detailed entries into what I think you call a Receipts and Payments Account, and have rounded the figures to the nearest £1‟.
After you had perused the above account, Guy Rowppe explained the numbered items, as follows:
(1) On admittance to membership of the club, new members pay an initial entrance fee together with their annual subscription. At 31 October 1982,
annual subscriptions of £70 had been paid in advance and £180 was owing but unpaid; of this latter amount, £40 related to members who left
during the current year and is now no longer recoverable. The figures at 31 October 1983 are £100 subscriptions in advance and £230
subscriptions in arrear. The policy of the club is to take credit for subscriptions when due and to write off irrecoverable amounts as they arise.
(2) As an alternative to paying annual subscriptions, members can at any time opt to pay a lump sum, which gives them membership for life without
further payment.
FINANCIAL ACCOUNTING 1
332 Other Aspects of Final Accounts
Amounts so received are held in suspense in a Life Membership Fund account and then credited to Income and Expenditure Account in equal
instalments over 10 years; the first such transfer takes place in the year in which the lump sum is received. On 31 October 1982 the credit balance
on the Life Membership Fund Account was £4,720, of which £850 credited was as income for year ended 31 October 1983.
(3) The club has a permanent training ground. Non-members can use the facilities on payment of a fee. In order to guarantee a particular facility,
advance booking is allowed. Advance booking fees received before 31 October 1983 in respect of 1984 total £470. The corresponding amount
paid up to 31 October 1982 in advance of 1983 was £325. Members can use the facilities free of charge.
(4) Club members can take out insurances through the club at advantageous rates. Initially, premiums are paid by members to the club. Subsequently,
the club pays the premiums to an insurance broker and receives commission. At 31 October 1982, premiums received but not yet paid over to the
broker amounted to £102 and commissions due but not yet received were £11. The corresponding amounts at 31 October 1983 are £160 and £13
respectively.
(5) The grounds man is employed for the six months April to September only. He is then paid a retaining fee to secure his services for the
following year. At 31 October 1982 the grounds man had been paid a retainer (£250) for 1983. Included in the Wages figure (£3,600) is the
retainer (£300) for 1984.
(6) Sporting requisites are sold only on cash terms. There are therefore no debtors for these items.
(7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163; the corresponding figure on 31 October 1983 was £202.
(8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31 October 1983, was £927. In arriving at this latter figure, the sum
of £137, representing damaged and unsaleable stock at cost price, had been excluded.
(9) Postage stamps unused at 31 October 1983 totalled £4.
(10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36 respectively.
(11) Rates are payable to the District Council in two installments (in advance) each year. £360 had been paid on 1 October 1982, £390 on 1 April
1983 and £456 on 1 October 1983.
(12) The club receives interest on investments bought a number of years ago at a cost of £7,400 (current valuation £7,550). At the end of October
1983, the club had acquired further investments which cost £5,600 (current valuation £5,600) and at the same time placed £3,000 in a short-
term deposit account.
(13) The written down value of the furniture which had been sold during the year was £350; it had originally cost £800.
Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an inclusive cost of £4,000. Subsequently, the club had some timber
buildings erected to provide various facilities for members. The total cost of these buildings was £35,000; depreciation is calculated at the rate of 10%
per annum on a straight-line basis. At 31 October 1982, the provision for depreciation account had a balance of £9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club‟s books as £7,900 (cost) against which there was a provision for
depreciation of £4,150 (calculated on the same basis as for buildings). Apart from the disposal referred to in note (12) above there had been no other
disposals or acquisitions during the year.
Required:
Prepare the club‟s Income and Expenditure Account for year ended 31 October 1983 and the Balance sheet at that date.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
334 Other Aspects of Final Accounts
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
QUESTION ONE
The bank account of Fuller Ltd, prepared by the company‟s book-keeper, was as shown below for the month of October 19-6:
Bank Account
19-6 19-6
Oct Oct
1 Balance c/d 91.40 2 Petty Cash 062313 36.15
3 McIntosh and Co 260.11 3 Freda‟s Fashions 062314 141.17
3 Malcolm Brothers 112.83 6 Basford Ltd 062315 38.04
3 Cash sales 407.54 8 Hansler Agencies 062316 59.32
14 Rodney Photographic 361.02 9 Duncan‟s storage 062317 106.75
17 Puccini‟s Cold Store Ltd 72.54 9 Aubrey plc 062318 18.10
20 Eastern Divisional Gas 10 Secretarial services Ltd 062319 28.42
Board – rebate (August
direct credit) 63.40
22 Grainger‟s Garage 93.62 14 Trevor‟s Auto repairs 062320 11.75
29 Cash sales 235.39 15 Wages cash 062321 115.52
31 Balance c/d 221.52 16 Towers Hotel 062322 44.09
17 Bank charges (September) - 12.36
20 Broxcliffe borough
Council SO 504.22
21 Eastern Area Electricity
Board DD 108.64
24 Eastern Divisional Gas
Board DD 41.20
28 Petty Cash 062323 119.07
In early November, the company‟s bank sent a statement of account which is reproduced below:
FINANCIAL ACCOUNTING 1
336 Other Aspects of Final Accounts
£ £ £
1 BCE 90.45
2 CR 175.02 265.47
3 CR 780.48 910.02
17 CR 443.56 1,151.12
20 SO 504.22 646.90
21 DD 196.83 343.32
22 CR 93.62 162.21
28 DD 108.64 80.42
Abbreviations:
BCE = Balance SO = Standing Order CR = Credit ADJ = Adjustment
INT = Interest DD = Direct Debit CGS = Charges
Required:
Prepare the company‟s bank reconciliation statement as at 31 October 19-6.
FINANCIAL ACCOUNTING 1
338 Other Aspects of Final Accounts
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul Rudyerd, a wholesale fruiter, at the end of his financial year ended on
31 May 19X1.
£ £
Purchases and sales 104,310 146,200
Stocks 3,010
Motor vehicles at cost 26,360
Provision for depreciation on motor vehicles as at 1 June 19X0 12,960
Warehouse equipment at cost 20,000
Debtors and creditors 25,250 21,200
Bank 3,200
Motor vehicle expenses 11,960
Rent and rates 11,220
Advertising 2,500
Sundry expenses (including insurance and electricity) 3,470
Drawings 6,600
Capital as at 1 June 19X0 ______ 31,120
214,680 214,680
(a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a consignment of rare fruit from abroad which cost £300, which would
normally sell for approximately £660, but which is badly bruised and could be sold as juice pulp for £100.
(b) Depreciation on motor vehicles is normally charged at an annual rate of 20%, using the reducing balance method. The motor vehicles at cost
figure includes a new car purchased during the year for £9,600 for Rudyerd‟s personal use which it is estimated will last four years with an
estimated residual value of £4,000.
(c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
Prepayments Accruals
£ £
Rates 230
Rent 160
Insurance 180
Electricity 200
(d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of outstanding debtors should be created.
(e) A recording error has resulted in a second-hand delivery van, purchased on 2 June 19X0 for £9,000, being treated as a motor vehicle expense.
(f) No record has been made of fruit, estimated to have cost £520, withdrawn from the business by Rudyerd for his personal use.
(g) No adjustment should be made, in preparing the answer to part (a) for the new warehouse equipment purchased during the year.
Required:
(a) Prepare a draft trading, profit and loss account for Paul Rudyerd‟s wholesale fruit business for the year ended 31 May 19X1 and a draft balance
sheet as at 31 May 19X1. (15 marks)
(b) Briefly explain what accounting concepts and conventions would be important in considering the treatment of the new warehouse equipment.
(4 marks)
(c) Itemize the additional information that you would wish to know before you could make the appropriate adjustments to the above financial
statements in respect of the new warehouse equipment. (3 marks)
QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after your arrival the finance director is rushed into hospital; the auditors
are about to arrive to prepare the accounts for the recently-ended financial year; you cannot find any working papers for the previous year‟s accounts;
and the other accounts staff are too busy to assist you in preparing for the auditor‟s visit.
The eight situations described below are detailed on a notepad left by the finance director and their treatment in the accounts needs to be considered by
you.
FINANCIAL ACCOUNTING 1
340 Other Aspects of Final Accounts
(a) A supply of office stationery was purchased five months before the year-end at a cost of £1,000. At the year-end it is estimated there is about
£250 worth left in stock.
(b) An electronic typewriter was purchased during the year at a cost of £270. It is estimated to have a useful life of five years.
(c) A batch of goods was produced to a customer‟s special order. The goods cost £5,800 but have not been delivered as it transpires the customer is
now bankrupt. A buyer for the goods has been found, who will pay £4,500 but modifications costing £1,200 will have to be made to the goods.
(d) Three technical staff have spent the last six months exclusively on a new product design project; their salaries for this period amount to £22,000.
At the year-end it is known that the design stage will take another month, to be followed by market research; after this the directors will decide
whether the project should proceed to production and marketing. The company‟s chief engineer is confident that sales of the new product will
start in the next financial year and will last for at least four years.
(e) A freehold property was purchased on the first day of the financial year at a cost of £650,000. The building is estimated to have a useful life of ten
years when it is expected it will have to be demolished for redevelopment. It is estimated that the freehold land, at the time of purchase, was
worth £500,000.
(f) A specialist machine was purchased seven years ago for £200,000. It has been depreciated, using the straight-line method, at 10% per annum since
then. To the beginning of the year under review £120,000 depreciation has been provided. The chief engineer has advised that the machine is
worn out and would need to be rebuilt to last more than another two years. The directors have already decided the machine should not be rebuilt
but scrapped one year after the end of the year under review.
(g) The debtors‟ ledger shows balances totalling £52,000 at the year-end. Two debts, totalling £2,000, are known to be bad. Another customer has
gone into liquidation owing £3,000; it is expected he will be able to pay 60p of every £ owed to his creditors. The sales director recommends a
general bad debt provision of 2% in respect of the remaining debtor balances.
(h) The company has undertaken a heavy advertising campaign throughout the year under review to promote its corporate image and product range.
The sales and managing directors feel that this campaign will benefit the company for at least a further six months after the year end. You
determine that the campaign cost £150,000 and has been fully paid for before the year-end.
Required:
For each of the eight situations described above:
(a) Describe what action should be taken in respect of:
(i) The amount to be charged or credited to the year‟s profit and loss account (if any);
(ii) The value to be placed on the asset in the balance sheet at the year end (if any);
(8 marks)
(b) State what accounting assumptions, conventions or concepts could be involved and give reasons, where there is a conflict between two or more of
them, why you have chosen the action you propose. (9 marks)
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31 December 19X9:
Ksh Ksh
Carriage inwards 6,310
Capital account at 1 January 19X9 500,000
Motor vans 200,000
Stock at 1 January 19X9 164,000
Balance at bank 116,860
Purchases 1,593,690
Sales 2,224,000
Trade debtors 290,000
Trade creditors 157,600
Rent and rates 56,080
Salaries 350,400
General expenses 44,720
Motor expenses 25,600
Discounts allowed 40,400
Discounts received 37,600
Insurance 17,600
Bad debts 30,400
Provision for doubtful debts 1 Jan 19X9 8,000
Provision for depreciation on vans 60,000
Drawings 50,000
Disposal 6,000
Returns inwards 7,140 _______
2,993,200 2,993,200
FINANCIAL ACCOUNTING 1
342 Other Aspects of Final Accounts
(b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected to sell them at Ksh 232,470.
(c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
(d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but the instalment due on 31 December 19X9 was not paid until 15
January in the next year.
(e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
(f) Depreciation is to be provided for on the motor truck at the rate of 20% per annum straight line on cost.
(g) General expenses include Ksh 3,060 relating to the telephone account which is made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
(h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent sand rates relate to private use.
Prepare a trading and profit account for the year to 31 st December 19X9, and a balance sheet as at 31 December 19X9.
QUESTION FIVE
The balance sheet of Johnson‟s shop at 1 October 19X7 was as follows:
The following is a summary of the transactions which took place during the year to 30 September 19X8:
1. Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh 83,000.
2. Stock in trade bought, all on credit for Ksh 78,000.
3. Cash of Ksh 113,000 was taken from the till (cash register) and paid into the bank.
4. The trade creditors were paid Ksh 73,000 by cheque.
5. Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The loan is for 5 years.
6. Wages of Kshs 17,000 were paid in cash.
7. Rates of Ksh 2,900 were paid by cheque.
1. Interest Ksh 2,500 due to Black for the year was unpaid.
2. Shop fittings are to be depreciated at 10% per annum on the total at the year-end; the delivery van is to be depreciated at 20% per annum of the
total at the year-end.
3. The rates payment during the year included Ksh 1,000 in respect of the period 1/10/19X8 to 31/3/19X9.
4. The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.
Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for the year to that date.
FINANCIAL ACCOUNTING 1
Lesson Seven 344
LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying on a business common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e.g.) lawyers, doctors, accountants etc. whose
maximum membership is twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree on the terms upon which the partnership will be run
and the relationship between each other. This is done in writing and signed off as agreed by all the partners and therefore it becomes a partnership
deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities of the partnership (i.e.) the profits or losses
and any drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital account becomes a fixed capital account. When
there is no distinction between a capital account and a current account then any short- term changes are passed through the capital account therefore
the capital account becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are shown in the following formats.
CAPITAL ACCOUNT
A B C A B C
£ £ £ £ £ £
Loss or revaluation xx xx xx Bal b/d xx xx xx
Goodwill written off xx xx xx Additional capital xx xx xx
(c/book or asset)
Gains on revaluation xx xx xx
Bal c/d xx xx xx Goodwill xx xx xx
xx xx xx xx xx xx
Bal b/d xx xx xx
CURRENT ACCOUNT
A B C A B C
£ £ £ £ £ £
Bal b/d xx Bal b/d xx xx
Interest on drawings xx xx xx Interest on capital xx xx xx
Drawings xx xx xx Salaries xx xx xx
Share of profits xx xx xx
Bal c/d xx xx - Loan interest - xx -
Bal c/d xx
xx xx xx xx xx xx
xx Bal b/d xx xx xx
FINANCIAL ACCOUNTING 1
Lesson Seven 346
£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)
£ £
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)
Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the business should be shown separately and any loan given
by a partner to the firm is also shown separately in the non-correct liability section therefore, the format will be as follows.
£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
FINANCIAL ACCOUNTING 1
Lesson Seven 348
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx
Example 7.1
Read the following and answer the questions below.
A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:
(a) From the information above prepared the firm‟s appropriation account and the partners‟ current accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840
CURRENT ACCOUNT
A B A B
FINANCIAL ACCOUNTING 1
Lesson Seven 350
£ £ £ £
Drawings 12,860 13,400 Interest on capital 6,000 4,800
Salaries 9,000 6,000
Bal c/d 5,660 920 Profit shared. 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920
EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet extracts at the date, from the following:
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)
FINANCIAL ACCOUNTING 1
Lesson Seven 352
Current Account
W P H W P H
£ £ £ £ £ £
Interest on draw 240 180 130 Bal b/d 1,860 946 717
Drawings 9,200 7,100 6,900 Interest on capital 2,000 1,500 900
Bal c/d Salaries 2,000 3,500
Share of profits 10,000 6,300 4,200
Bal c/d 4,920 3,466 2,287
14,360 10,746 9,317 14,360 10,746 9,317
Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and Stone, trading partnership, sharing the balance
of profits and losses in the proportions 3:2 respectively.
£
Printing, stationery and postage 3,500
Sales 322,100
Stock in hand at 1 October 19X8 23,000
Purchases 208,200
Rent and rates 10,300
Staff salaries 36,100
Additional information
1. £10,000 is to be transferred from Brick‟s capital account to a newly opened Brick Loan Account on 1 July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%
FINANCIAL ACCOUNTING 1
Lesson Seven 354
Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include summaries of the partners‟ capital and current accounts for the year
ended on that date.
Note: In both (a) and (b) vertical forms of presentation should be used.
SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
Discounts allowable 950
Discounts receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings at cost 26,000
Provision for depreciation 11,200
Motor vehicles at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470
TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9
£ £ £
Sales 322,100
Less: Sales returns 2,100
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
FINANCIAL ACCOUNTING 1
Lesson Seven 356
Current Account
Brick Stone Brick Stone
£ £ £ £
Drawings 24,000 12,000 Bal b/d 3,600 2,400
(adj)
Interest on loan 250
Bal c/d 2,800 11,700 Salaries. 6,000
Share profits 22,950 15,300
26,800 26,800 26,800 23,700
FINANCIAL ACCOUNTING 1
Lesson Seven 358
EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance as at 30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 19X8 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,000
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040
Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance sheet as at that date.
FINANCIAL ACCOUNTING 1
Lesson Seven 360
FINANCIAL ACCOUNTING 1
Lesson Seven 362
£ £
Drawings 64,000 balance b/d 13,060
Interest on drawings 1,800 salary 8,000
Interest on capital 35,000
Profit 82,100
bal c/d 72,360
138,160 138,160
£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580
£ £ £
Non Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300
Current Assets
Stock 56,3400
Debtors (16,243 – 320) 15,9230
Cash at bank 6770
72,9400
Current Liabilities
Creditors 111,500
Accruals (200 + 96) 2,960 (114,460) 61,4940
1,174,240
FINANCIAL ACCOUNTING 1
Lesson Seven 364
1,174,240
Example 7.5
JUNE 1998 QUESTION 4
The balance sheet of the partnership of Kombo and Nzuki as at 31 March 1997 was as follows:
After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer‟s account as Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated at 20% by straight line method on an assumed residual value of
Sh.20,000 had been sold at Sh.60,000 but no entries, other than in the bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad debts should have been maintained at 10% of debtors.
7. Kombo‟s current account had been credited with a partnership salary of Sh.60,000 which should have been credited to Nzuki‟s current
account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200. No entries had been made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%
FINANCIAL ACCOUNTING 1
Lesson Seven 366
Required:
a) A statement of adjustments to show the correct net profit for the y (12
marks)
b) A suspense account showing how the balance is eliminated from the books.
(2 marks)
c) A corrected balance sheet as at 31 March 1997. (8 marks)
SOLUTION
The following journal can be included although not required in the question.
DR CR
i) DR: Suspense Account 26,400
CR: Discount Allowed Account 26,400
FINANCIAL ACCOUNTING 1
Lesson Seven 368
FINANCIAL ACCOUNTING 1
Lesson Seven 370
326,300 326,300
Capital Accounts
Kombo 1,400,000
Nzuki 1,400,000 2,800,000
Current Accounts
Kombo 198,128
Nzuki 86,352 284,480
3,084,480
NB
This is a very good question on partnership as it combines both errors on the accounts and Partnerships. Please study it carefully and follow up the
entries and adjustments.
The next example is still on past paper and combines both incomplete records and partnerships.
FINANCIAL ACCOUNTING 1
Lesson Seven 372
Kefa and Mark are partners sharing profits and losses equally. They do not maintain proper books of accounts. The following information has been
obtained from the available records on 31 March:
1996 1997
Sh. Sh.
Balance at bank 94,800 169,680
Stock in trade 541,200 488,640
Trade debtors 612,000 ?
Trade creditors ? 305,760
Furniture 360,000
Motor vehicles (book value) 1,920,000
Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while purchases, all on credit for the same period were Sh.2,952,480. On 31
March 1996 Kefa‟s capital was Sh.200,000 less than that of Mark. The analysis of the cash book for the year ended 31 March 1997 shows the following:
Receipts:
Cash from credit sales 3,491,520
Additional capital by Kefa 240,000
Cash sales 586,800
Payments:
For purchases 3,070,080
Salaries paid 420,000
Rent paid (for 6 months to 30.9.96) 144,000
Rates paid (for 6 months to 30.6.97) 120,000
Electricity charges 60,000
Advertising 41,760
Motor vehicle expenses 119,520
Sundry expenses 33,600
Drawings - Kefa 132,480
Mark 102,000
On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One vehicle was sold on credit for Sh.640, 000 while the other was taken
over by Kefa at a valuation of sh.250, 000. the combined book value of the two vehicles was Sh.660,000. the transaction has not been recorded in the
books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March 1997. No depreciation is to be provided
for the vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997. (10 marks)
b) Balance sheet as at 31 March 1997. (8 marks)
c) Partner‟s capital accounts (4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
Trading, Profit and loss account for the year ended 31 March 1997
Sh Sh.
Sales 3,849,120
Less cost of sales
Opening stock 541,200
Purchases 2,952,480
Less: Closing stock 488,640) (3,005,040)
FINANCIAL ACCOUNTING 1
Lesson Seven 374
Current Assets
Stock 488,640
Debtors – Trade Adjustment 382,800
- others vehicle 640,000
Prepayments 60,000
Bank 169,680
1,741,120
Current Liabilities
Creditors 305,760
Accruals 166,320 (472,080) 1,269,040
2,727,040
Capital - Kefa 1,243,280
Mark 1,483,760
2,727,040
FINANCIAL ACCOUNTING 1
Lesson Seven 376
Capital Account
Kefa Mark Kefa mark
Shs. Shs. Shs. Shs.
Drawings 132,480 102,000 Bal b/d 1,452,320 1,652,320
Disposal 250,000 Cash 240,000
Loss shared 66,560 66,560
Bal c/d 1,243,280 1,483,760
1,692,320 1,652,320 1,692,320 1,652,320
1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the share of a partner‟s effort to improve the business. The problem
is normally to ascertain the value or cost of goodwill.
There are two types of goodwill:
1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates. There are various approaches to these. Goodwill maybe arrived at by
taking the average profits for lets say three previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or shown in the accounts.
2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business above its net assets.
This is less subjective because it is the excess amounts paid for a business above its net assets.
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these case the net assets will be total assets less total liabilities) of another
business that is still trading on and the value of the net asset is 3 M, therefore the purchased goodwill may be shown in the accounts as an
intangible asset. Purchased goodwill can be treated in the following three main ways:
The practice is normally to carry it in the accounts together with the other assets (as an intangible asset) and amortize it over estimated
period of time.
FINANCIAL ACCOUNTING 1
Lesson Seven 378
In a partnership, there are normally three situations where goodwill is accounted for in the accounts:
The goodwill may remain in the accounts and therefore no partner entries will be made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner‟s capital account (in the New profit sharing ratio)
Crediting goodwill account
Example:
A and B have been trading as partners sharing profits and losses equally. They decided to change profit sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.
Solution:
1) CAPITAL ACCOUNT
A B A B
Bal b/d 1,000,000 1,500,000
Goodwill(OPSR) 250,000 250,000
Bal c/d 12,500,000 1,750,000
12,500,000 1,750,000
2) CAPITAL ACCOUNT
A B A B
Goodwill (NPRS) 300,000 200,000 Bal b/d 1,000,000 1,500,000
Bal c/d (NPSR) 950,000 1,550,000 Goodwill 250,000 250,000
(OPSR)
12,500,000 1,750,000 12,500,000 1,750,000
REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based on market price.
The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.
Any revaluation gains or losses are passed through a new account (i.e) a Revaluation account and the balance on this account profit or low on
revaluation is transferred to the partner‟s capital accounts in the existing profit sharing ratio.
Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1. They have the following assets and liabilities at the book values and
they wish to restate these values at market values and agreed values.
Required:
Prepare Revaluation account and the partner‟s capital account given the partner‟s balances as
A £3,000,000
B £2,500,000
C £1,500,000
REVALUATION ACCOUNT
£ £
FINANCIAL ACCOUNTING 1
Lesson Seven 380
CAPITAL ACCOUNT
A B C A B C
Goodwill £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Bal b/d 3,000 2,500 1,500
Bal c/d 3,140 2,640 1,510 Revaluation 140 140 70
3,140 2,640 1,570 3,140 2,640 1,570
If there is a profit on revaluation, then the profit will be transferred to the partner‟s capital account by:
Dr. Revaluation
Cr. Partner‟s capital account in the profit share ratio
If there is loss then
Dr. Partner‟s capital account
Cr. Revaluation in the profit share ratio
EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively.
Fixed Assets £ £
Premises 90,000
Plant 37,000
Vehicles 15,000
Fixtures 2,000
144,000
Current Assets
Stock 62,379
Debtors 34,980
Cash ___760 98,119
£242,119
Capital
Alan 85,000
Bob 65,000
Charles 35,000
185,000
Current account
Alan 3,714
Bob (2,509)
Charles 4,678 5,883
Current liabilities
Creditors 19,036
Bank overdraft 4,200
£242,119
Charles decides to retire from the business on 30 June 19X6, and Don is admitted as a partner on that date. The following matters are agreed:
FINANCIAL ACCOUNTING 1
Lesson Seven 382
The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his
new partners.
Required;
a) Account for the above transactions, including goodwill and retiring partners‟ accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 19X6.
Solution:
Capital Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
Goodwill
written off 12,000 18,000 12,000 - Bal b/d - 85,000 65,000 35,000
Motor - - - 3,900 Goodwill - 21,000 14,000 7,000
vehicle
Cashbook - 21,000 38,100 Cash book 79,000 - - -
Bal c/d 67,000 67,000 67,000 -
79,000 106,000 79,000 42,000 79,000 106,000 79,000 42,000
Current Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
FINANCIAL ACCOUNTING 1
Lesson Seven 384
Revaluation Account
£ £
Plant 2,000 Premises 30,000
Stock 8,200
Debtors 3,000
Profits shared:
Alan 8,400
Bob 5,600
Charles 2,800 _____
30,000 30,000
Cash book
£ £
Bal b/d 760 Charles – capital account 38,100
Don - capital account 79,000 Loan 8,000
Current account 3,091 Current account 7,478
Alan – capital account 21,000
Current account 9,023
Bal c/d ******
Cash book
£ £
Bal b/d 4,200
Don - capital account 79,000 Charles – capital account 38,100
Current account 3,091 Loan account 8,000
Current account 7,478
Alan – capital account 21,000
Current account 9,023
Current Accounts
Alan 3,091
Bob 3,091
Don 3,091 9,273
210,273
Non current liabilities
Loan – Charles 20,000
230,273
NOTE:
i. Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios.
FINANCIAL ACCOUNTING 1
Lesson Seven 386
ii. Same case applies for any gain or loss in the revaluation of assets.
iii. Goodwill written off in the new profit sharing ratios against the capital accounts only for the new partners.
iv. When there is no enough cash to be paid to the retiring partners, his balance remains in the business as a loan.
If the admission is taking place part way through the financial period, then the new partner will be entitled to the profits or losses for the remaining part
of the financial period. (i.e from the point of joining the partnership).
Care should be taken when apportioning interest on capital, salaries and profits because of the changes
Example:
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners‟ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,070,000
13,420,000 13,420,000
Additional information:
1. On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be shared on the ratio 2:2:1. For the
purposes of this admission, the value of goodwill was agreed at Sh.3, 000,000. No account for goodwill was to be maintained in the books,
adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 more
into the firm of which Sh.375,000 comprised his fixed capital and the balance was credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui‟s admission. In addition, after Tonui‟s admission, no
interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated were to be apportioned on a time
basis.
4. A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on
cost.
5. On 30 April, the stock was valued at Sh.1,275,000.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners‟ current accounts for the year ended 30 April 2001 (4 marks)
c) Balance sheet as at 30 April 2001 (7 marks)
(Total: 20 marks)
Solution
FINANCIAL ACCOUNTING 1
Lesson Seven 388
1.3.2000-3.10.2000 1.11.2000-30.4.2001
Sh Sh Sh Sh Sh Sh
Gross profit S
GP 1,858,000 2,787,000 4,645,000
TS
Expenses
Dep. Motor Vehicle 160,000 160,000 320,000
Furniture 15,000 15,000 30,000
Salaries 483,750 483,750 967,500
Accountancy fees 52,500 52500 105,000
Wages 275,000 275,000 550,000
Rent, rates, electricity 137,500 137,500 275,000
General expenses 362,400 359,600 612,000
Prov. For depreciation 30,000 (1,506,150) 10,000 (1,393,350) 40,000 2,899,500
Net Profit 351,850 1,393,650 1,745,500
Less: Interest on
capital
Rotich 37,500 37,500 75,000
Sinei 25,000 25,000 50,000
Tonui - (62,500) 18,750 (81,250) 18,750 (143,750)
Balance of profit 289,350 1,312,400 1,601,750
shared
Rotich 2 3 2 5 192,900 524,960 717,860
Sinei 1 3 2 5 96,450 524,960 621,410
Tonui - 1 5 - (289,350) 262,480 (1,312,400) 262,480 (1,601,750
b)
Current Account
R S T R S C
Sh. Sh. Sh. Bal b/d Sh. Sh. Sh.
Goodwill 1,200,000 1,200,000 600,000 400,000 300,000 -
w/o
Capital A/C - - 375,000 Cash book 1,250,000
Drawings 150,000 120,000 62,500 Goodwill 2,000,000 1,000,000
FINANCIAL ACCOUNTING 1
Lesson Seven 390
(2:1)
Interest on 75,000 50,000 18,750
capital
Profit share 717,860 621,410 262,480
Bal c/d 1,842,860 651,410 493,730
3,192,860 1,971,410 1,531,230 3,192,860 1,971,410 1,531,230
Current Assets
Stock 1,275,000
Debtors 193,000
Less Provision (40,000) 153,000
Prepayments 50,000
Balance at bank 820,000
2,298,000
Current Liability
Creditors 1,070,000
Accruals 15,000 (1,085,000) 1,213,000
4,613,000
(d) The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any introduction of goodwill and revaluation
of assets
Some of the adjustments may also be made in the current accounts if adjustments are made in the capital account and the admission is partway
through the financial period, then any interest to be charged on capital will be based on the adjusted capital balance.
If the adjustments are made in the current account then there will be no change on the capital balance and therefore no change on the interest
charged on the capital balances.
FINANCIAL ACCOUNTING 1
Lesson Seven 392
If the retirement takes place during the financial period, then the retiring partner is entitled to take profits made up to the point of retirement. Any
interest of capital, salaries and balance of profit shared in profit share ratio will be credited to the partner‟s current account.
Therefore the profit and loss account will be split between the two periods and appointment of profits done and this will be based on the terms
of the partnership in each period.
EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively
Additional information:
1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while Kyamba and Onyango continued in
partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value Transfer value
Sh Sh.
Fixed assets 260,000 306,000
Stocks 166,000 157,000
Debtors 172,000 165,000
Creditors 156,000 156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the net amount due for him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000 but was not to be maintained in the books of the partnership of
Kyamba and Onyango.
4. After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and details of the new partnership.
Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively.
Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001 and the balance of the profits be shared
equally after allowing for annual salaries of Sh.72, 000 to Kyamba and Sh.60, 000 to Onyango.
5. The profit of the new partnership before interest on capitals and partners‟ salaries was Sh.240,000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000, debtors by Sh.90,000 and bank balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango Sh.70,000.
Required:
a) Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)
b) Capital accounts for the year ended 31 March 2002 (4 marks)
c) Current accounts for the year ended 31 March 2002. (4 marks)
d) Balance sheet of the new partnership as at 31 March 2002. (8 marks)
(Total: 20 marks)
FINANCIAL ACCOUNTING 1
Lesson Seven 394
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh Sh.
Net profit for the year 240,000
Less: Interest on capital
Kyamba 20,000
Onyango 20,000 (40,000)
200,000
Less: Salaries
Kyamba 72,000
Onyango 60,000 (132,000)
Balance of profits shared in PSR 68,000
Kyamba ½ 34,000
Onyango ½ 34,000 (68,000)
b) CAPITAL ACCOUNT
K O W K O W
(2) Goodwill in 100,000 100,000 - Bal b/d 160,000 140,000 200,000
New PSR
(4) Fixed Assets 306,000 (1)Goodwill in 80,000 80,000 40,000
old PSR
Stocks 157,000 Cashbook 48,000 68,000 -
Debtors 165,000 Profit on transfer 12,000 12,000 6,000
in old PSR
Creditors 156,000
Bal c/d 200,000 200,000 Current account 53,000
(3)
Cash book (**) 173,000
300,000 3000,000 628,000 300,000 300,000 628,000
c) CURRENT ACCOUNT
K O W K O W
Sh Sh Sh Sh Sh sh
Capital - - 53,000 Bal b/d 65,300 49,000 53,000
Drawings 85,000 70,000 - Interest on 20,000 20,000 -
capital
Salaries 72,000 60,000 -
Bal c/d 106,300 93,000 - Share of profits 34,000 34,000 -
FINANCIAL ACCOUNTING 1
Lesson Seven 396
Workings:
Stock:
Bal b/f 294,000
Transfer (166,000)
Increase 100,000
228,000
Debtors:
Bal b/f 209,000
Transfer (172,000)
Increase 90,000
127,000
Creditors:
Bal b/f 252,000
Transfer 156,000
96,000
EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been extracted from their books of account as at 31 March 19 –2 after their
trading and profit and loss account has been prepared, but before any consequent adjustments have been made to the partners‟ respective capital
accounts.
Dr. Cr.
Capital accounts (as at 1 April 19 – 1): £ £
Upp 60,000
Downe 40,000
Cash 6,600
Creditors 29,250
Debtors 201,000
Downe: goods withdrawn 400
Drawings:
Upp (all at 31 December 19 – 1) 20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost 200,000
Accumulated depreciation 90,000
Accrued interest on Upp‟s Loan account 10,000
Loan account: Upp 50,000
Net profit for the year to 31 March 19 – 2) 179,750
Salary: Downe 12,000
Stocks 3,500
Upp: private expenses paid (on 31 March 19 – 2) 500
£459,000 459,000
Additional information
1. The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the year at a rate of interest of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be revalued at their market value as at the date of retirement of the
partner.
2. Upp decided to retire at 31 March 19 – 2. In accordance with the partnership agreement, the assets and liabilities were revalued as follows:
£
Car (to be retained by UPP) 10,000
Remaining fixed assets taken over by the new partnership 50,000
Stocks 5,000
Debtors 180,000
Creditors 35,000
Goodwill 40,000
FINANCIAL ACCOUNTING 1
Lesson Seven 398
Legal and other expenses connected with the partnership change 4,750
3. Following Upp‟s decision to retire, Downe invited Side to join him in partnership as fro 1 April 19 – 2. Side agreed to pay £75,000 into the new
partnership as at that date as his capital contribution. Profits and losses are to be shared in the proportion Downe 75% and side 25%. Goodwill
is not to be retained in the books of the partnership.
4. Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan in the new partnership, the other half being
paid to him in cash.
5. It may be assumed that all of the transactions relating to the changes in the respective partnerships take place on 1 April 19 – 2. The legal and
other expenses connected with the partnership changes were due for payment on 30 April 19 – 2.
Required:
Prepare:
a. Upp and Downe‟s profit and loss appropriation account for the year to 31 March 19 – 2.
b. Upp, Downe and Side‟s respective capital accounts sufficient to reflect all of the above transactions. and
c. Downe and Side‟s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions have
been settled.
(Detailed working should be submitted with your answer).
SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2
£ £ £
Net profit b/d 179,750
Add interest on drawings
Upp [3/12 x (10% x 20,000)] 500
Downe [16/12 x (10% x 15,000)] 750 1,250
181,000
Less:
Interest on capital 9,000
Upp [15% x 60,000] 6,000 (15,000)
Downe [15% x 40,000 166,000
Less: Salary – Downe (16,000)
Balance of profits shared in PSR 150,000
Capital – Upp (1/2) 75,000
- Downe (1/2) 75,000 150,000
_____-
FINANCIAL ACCOUNTING 1
Lesson Seven 400
(b)
Capital Accounts
Upp Downe Upp Downe
£ £ £ £
Appropriation Balances b/d 60,000 40,000
- interest on drawings 500 750 Loan interest 10,000
Salary 12,000 Appropriation
Drawings 20,000 15,000 -salary 16,000
Private expenses/goods 500 400 -interest on capital 9,000 6,000
Car 10,000 -residual profit 75,000 75,000
Revaluation (deficit) (W1) 20,000 20,000
[see workings after (c)]
Loan (balancing figure) 103,000
Balance c/d _____- 88,850 ______ ______
154,000 137,000 154,000 137,000
(c)
Balance Sheet as at 1 April 19-2
£ £
Non current assets 50,000
Current assets
Stocks 5,000
Debtors 180,000
Cash (W3) __5,100
190,100
Current liabilities
Creditors [35,000 + 4,750] 39,750
Working capital 150,350
Net assets employed 200,350
Financed by
Capital
Downe 58,850
Side 65,000
123,850
Loan
Upp (W4) _76,500
200,350
Workings
W1
Revaluation
£ £
Debtors 201,000 Creditors 29,250
Fixed assets (cost) 200,000 Provision for depreciation 90,000
Stocks 3,500 Capital – Upp (car) 10,000
Legal etc expenses 4,750 Fixed assets 50,000
Creditors 35,000 Stocks 5,000
Debtors 180,000
Goodwill 40,000
______ Balance c/d (deficit) 40,000
444,250 444,250
FINANCIAL ACCOUNTING 1
Lesson Seven 402
W2
Goodwill
£ £
Revaluation 40,000 Capital
-Downe (75%) 30,000
_____ -Side (25%) 10,000
40,000 40,000
W3
Cash
£ £
Balance b/d 6,600 Loan
Capital -Upp [1/2 x 153,000] 76,500
-Side 75,000 Balance c/d 5,100
81,600 81,600
Bal b/d 5,100
W4
Loan - Upp
£ £
Cash 76,500 Balance b/d 50,000
Balance c/d 76,500 Capital
-Upp 103,000
153,000 153,000
Balance b/d 76,500
REINFORCEMENT QUESTIONS
QUESTION ONE
1. K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys, Kimeu being responsible for the factory and Maingi for the sales.
All completed toys are transferred from the factory to sales department at agreed price. Profits are shared on the following basis:
Factory Sales Department
Kimeu 80% 40%
Maingi 20% 60%
The following trial balance has been extracted from the books at 31 March 1992:
Sh. Sh.
Freehold factory at cost 1,053,750
Factory plant, at cost 843,750
Provision for depreciation 1 April 1991 151,250
Delivery van, at cost 401,250
Provision for depreciation 1 April 1991 86,250
Stocks at 1 April 1991
Raw materials 100,700
Work-in-progress 85,000
Toys completed (30,000 at Sh.40) 1,200,000
Sales (45,500 toys) 2,775,500
Purchases of raw materials 716,250
Factory wages 375,500
Sales department wages 150,750
Expenses:
Factory 301,750
Sales Department 250,500
Provision for doubtful debts 1 April 1991 40,000
Trade debtors and creditors 450,000 150,000
Bank overdraft 176,200
Capital accounts:
Kimeu 1,400,000
Maingi 1,425,000
Drawings:
Kimeu 150,000
FINANCIAL ACCOUNTING 1
Lesson Seven 404
Maingi 125,000
6,204,200 6,204,200
Additional information:
i 38,000 toys at Sh.45 each were manufactured and transferred to Sales Department during the year. Tys in stock at the end of the year were to
be valued at Sh. 45 each. Stock of raw materials was Sh.79.50 and work-in-progress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii Accrued expenses outstanding at 31 March 1992:
Factory Sales Department
Sh. Sh.
Expenses 52,250 27,000
Factory wages 7,000 -
iii Provision for depreciation is to be made as follows:
- Factory plant 10% p.a. on cost
- Delivery van 20% p.a. on cost
iv The general provision for bad debts is to be maintained at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March 1992 and a balance sheet as at that date.
(20
marks)
QUESTION TWO
Amis, Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2. The following trial balance has been extracted from
their books of accounts as at 31 March 19-8:
£ £
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis 80,000
Lodge 15,000
Pym 5,000
Carriage inwards 4,000
Carriage outwards 12,000
Cash at bank 4,900
Current accounts:
Amis 1,000
Lodge 500
Pym 400
Discount allowed 10,000
FINANCIAL ACCOUNTING 1
Lesson Seven 406
6. According to the partnership agreement, Pym is allowed a salary of £13,000 per annum. This amount was owing to Pym for the year to 31
March 19-8, and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital account at a rate of 10% per annum. There were no movements on
the respective partners‟ capital accounts during the year to 31 March 19-8, and the interest had not been credited to them as at that date.
Required:
a) Prepare the Partners trading, profit and loss account for the year ended 31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8
QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after charging annual salaries of £20,000 each. The regularly make up their
accounts to 31 December each year.
On July 1996 they admitted Coral as a partner and agreed profits shares from that date of 40% Amber, 40% Beryl and 20% Coral. The salaries
credited to Amber and Beryl ceased from 1 July 1996.
FINANCIAL ACCOUNTING 1
Lesson Seven 408
£ £
Capital accounts as at 1.1.96:
Amber 280,000
Beryl 210,000
Capital account Coral (see note (d) below) 140,000
Current accounts as at 1.1.96
Amber 7,000
Beryl 6,000
Drawing accounts
Amber 28,000
Beryl 24,000
Coral 15,000
Loan account Amber 50,000
Sales 2,000,000
Purchases 1,400,000
Stock 1.1.96 180,000
Wages and salaries of staff 228,000
Sundry expenses 120,000
Provision for doubtful debts at 1.1.96 20,000
Freehold land at cost (see not (e) below) 200,000
Buildings: cost 250,000
Aggregate depreciation 1.1.96 30,000
Plant, equipment and vehicles: cost 240,000
Aggregate depreciation 1.1.96 50,000
Trade debtors and creditors 420,000 350,000
Cash at bank 38,000
3,143,000 3,143,000
In preparing the partnership accounts the following further information is to be taken into account:
a) Closing stock at 31 December 1996 was £200,000
b) Debts totaling £16,000 are to be written off and the provision for doubtful debts increased by £10,000.
c) Provision is to be made for staff bonuses totaling £12,000.
d) The balance of £140,000 on coral‟s capital account consists of £100,000 introduced as capital and a further sum of £40,000 paid for a 20%
share of the goodwill of the partnership. The appropriate adjustments to deal with the goodwill payment are to be made in the capital
accounts of the partners concerned, and no goodwill account is to remain in the records.
e) It was agreed that the freehold land should be revalued upwards on 30 June prior to the admission of Coral from £200,000 to £280,000.
The revised value is to appear in the balance sheet at 31 December 1996.
f) Amber‟s loan carries interest at 10% per annum and was advanced dot the partnership some years ago.
g) Provide depreciation on the straight-line basis on cost as follows:
Buildings 2%
Plant, equipment and vehicles 10%
h) Profits accrued evenly during the year.
Require:
a) Prepare a trading account, profit and loss account and appropriation account for the year ended 31 December 1996 and a balance sheet as
at that date. (17 marks)
b) Prepare the partners‟ capital accounts and current accounts for the year in columnar form.
(7 marks)
(Total: 24 marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs and maintenance are carried out and also a small showroom form
which new and second hand cars are sold.
For accounting purposes, each of these three activities is treated as a separate department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos comprised:
£
Cash sales:
Workshop (repair charges) 32,125
Petrol and oil 32,964
Showroom (car sales) 8,500
Credit sales:
Workshop (repair charges) 65,892
Petrol and oil 41,252
Showroom (car sales) 81,914
Stocks (at 1 October 1985):
Workshop (repair materials) 1,932
FINANCIAL ACCOUNTING 1
Lesson Seven 410
Electricity 9,453
General expenses 10,692
Wages:
Direct:
Workshop 34,050
Petrol and oil 5,602
Indirect:
Workshop 6,810
Showroom 4,160
Creditors:
Workshop 4,225
Petrol and oil 5,602
Showroom 15,250
Bank/Cash:
Workshop 316
Petrol and oil 1,605
Showroom 30,470
Debtors:
Workshop 1,365
Petrol and oil 537
Drawings:
Duke 12,190
Earl 9,740
Current accounts (at 1 October 1985) (credit balances):
Duke 9,750
Earl 10,477
Capital accounts:
Duke 50,000
Earl 40,000
FINANCIAL ACCOUNTING 1
Lesson Seven 412
6) Rates and electricity are apportioned over departments on the basis of the original cost of freehold buildings at the end of the current financial
year.
7) General expenses are apportioned over departments on the basis of turn over for the current year.
8) Duke and Earl are credited with interest on their respective capital account balances at the rate of 5% per annum.
Required:
Prepare, using separate columns for each department and the business as a whole;
a) A departmental trading and profit and loss account for Aristocratic Autos for the year ended 30 September 1986.
(20 marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September 1986.
(14 marks)
(Total: 34 marks)
FINANCIAL ACCOUNTING 1
Lesson Seven 414
QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on capital and partnership salaries is not provided. The position of
the business at th end of its financial year is:
Creditors 980
There were no additions to, or reductions of, the capital accounts during the four months, but the following drawings have been made:
Reg £2,000
Sam £1,600
Ted £1,800
FINANCIAL ACCOUNTING 1
Lesson Seven 416
It has also been agreed that the share of a deceased partner should be repaid in three equal installments, the first payment being made as on the
day after the day of death.
The surviving partners agree that Abe (son of Reg) should be admitted as a new partner with effect from 1 November, and it is agreed that he
will bring into the business £4,000 as his capital together with a premium for his share of the goodwill (using the existing valuation). The new
profit-sharing agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
Show the partnership Balance Sheet as at 1 November 19-6, on the assumption that the above transactions have been completed by that date.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the College.
QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts and payments, which he records in cash and bankbooks.
Periodically, these books are handed over to the firm of certified accountants that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary step, you have prepared the receipts and payments account (rounded
to the nearest £1) for the year ended 31 May 1985. This is shown below, together with the explanatory notes which the treasurer has supplied to enable
you to understand the nature o f some of the items.
Receipts Payments
Cash Bank Cash Bank
£ £ £ £ £ £
Opening balances b/d 31 309 Creditors: trade
Debtors: members Fixed assets (note 4)
Joining fees (note 1) 190 160 Musical instruments 522
Annual subscriptions Trophies 83
(Note 2) 285 70 Creditors: trade
Annual concert (note 3) Purchase for resale
Takings 1,791 (Note 4)
Sales of goods (note 4) Sheet music 118
FINANCIAL ACCOUNTING 1
Lesson Seven 418
1) On joining the Society, members pay a non-returnable fee of £10 (before 1 June 1982, the fee had been £). It has been found from experience
that, on average, members remain in the Society for five years. On this basis, one fifth of each joining fee is credited to Income and
Expenditure account each year.
2) Annual subscriptions are due on 1 June each year. It is Society‟s policy to credit these to income and expenditure account on an actual receipts
basis, not an accruals basis. However, if subscriptions are received in advance, the amounts are credited to income and expenditure account for
the year, which they are paid.
3) The Society‟s major money raising event is its annual public concert. This is given in a large hall, which the Society hires. The society also hires
professional musicians and soloists and has to pay the fees of the adjudicators (judges).
4) The society buys trophies (silver bowls and shield) to present to the winners of individual musical items at the annual concert. It also buys
musical instruments some of which are for use by the members and others for resale to the members. Musical scores and sheets are also
bought for resale to the members.
5) A local building company has given a grant to the Society for a period of three years in return for publicity. This sponsorship grant was received
in full on 1 June 1984 and is being credited to income and expenditure account in equal installments in each o the three years to 31 May 1987.
6) The performing Arts Council (PAC) has awarded the Society an annual grant towards the running costs. In addition the PAC makes capital
grants. The society‟s policy is to hold capital grants in suspense and to release each year‟s grant to income and expenditure account over a
period of five years, from the year of grants onwards. At 31 May 1984 capital grants held in suspense were analyzed as follows:
FINANCIAL ACCOUNTING 1
Lesson Seven 420
7) Throughout the year, the Society competes at various musical festivals. Cash prizes won by individual members are retained by the Society
and credited to income and expenditure account in order to reduce the cost of attending the festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each of them an ex-gratia (honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated to the Regional Musical Festival Community (RMFC). The annual
fee, which has remained the same for a number of years, is paid on 1 March in each year.
10) The Society pays rent for its premises. The rental, which is inclusive of rates, heating, lighting, cleaning etc. is reviewed annually on 31 March.
The payment shown in the receipts and payments account represents quarterly payments in advance, as follows:
1984 Payment
£
30 June 120
30 September 120
31 December 120
120
1985
31 March 150
£510
3) Stocks at 31 May
Goods for resale
Sheet music 31 52
Musical instruments 70 94
Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May 1985, showing the surplus or deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)
QUESTION TWO
A client of the firm of accountants by which you are employed is interested in buying a road transport business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business and has delegated to you the task of discovering the amount of
investment in vehicles at the end of each of the financial years ended 30 September 1980 to 1983 inclusive. The business had commenced operations
on 1 October 1979.
The only information available to you is the fact that the owner calculated depreciation at a rate of 20% per annum, using the Reduction Balance
method, based on the balance at 30 September each year, and copies of certain ledger accounts which are reproduced below:
FINANCIAL ACCOUNTING 1
Lesson Seven 422
£ 1980 £
1 Oct. Balance b/ 32,000
1981 1981
30 Balance c/d 57,600 30 Profit and loss 25,600
Sept. Sept.
57,600 £57,600
£ £
1982 1 Oct. Balance b/d 57,600
30 Disposals 10,800 1982
Sept.
Balance c/d 73,440 30 Profit and loss 26,640
Sept.
includes £10,000
(depreciation on
1982
acquisitions)
_____ _____
£84,240 £84,240
£ £
1983
30 Disposals 29,280 1 Oct. Balance b/d 73,440
Sept.
Balance 79,328 1983
30 Profit and loss 35,168
Sept.
(includes £20,000
Depreciation on
1983 acquisitions)
_______ ______
£108,608 £108608
1 Oct. Balance b/d 79,328
Disposals
£ £
1982 1982
30 Vehicles 30 Provision for
Sept. (vehicles Sept.
Originally Depreciation 10,800
acquired
On 1 October 30,000 Bank 16,000
1979)
Profit and loss 3,200
______ ______
£30,000 £30,000
£ £
1983 1983
30 Vehicles 300 Provision for
Sept. (vehicles Sept.
Originally Depreciation 29,280
acquired
On 1 October 60,000 Bank 42,000
1979)
Profit and loss 11,280
______ ______
£71,280 £71,280
Required:
a) Calculate the cost of asset, vehicles, held by the business at 30 September in each of the years 1980 to 1983 inclusive
(4 marks)
b) Show the detailed composition of the charge for depreciation of the vehicles to profit and loss account at 30 September 1981, 1982 and
1983. (9 marks)
All workings must be shown. (13 marks)
FINANCIAL ACCOUNTING 1
Lesson Seven 424
QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes the following items:
i. The sales ledger debit balances total £111,111 and the credit balances total £1,234.
ii. The purchase ledger credit balances total £77,777 and the debit balances total £1,111.
iii. The sales ledger includes a debit balance of £700 for business X, and the purchase ledger includes a credit balance of £800 relating to the same
business X. Only the net amount will eventually be paid.
iv. Included in the credit balance on the sales ledger is a balance of £600 in the name of H. Smith. This arose because a sales invoice for £600 had
earlier been posted in error from the sales daybook to the debit of the account of M. Smith in the purchase ledger.
v. An allowance of £300 against some damaged goods had been omitted from the appropriate account in the sales ledger. This allowance had been
included in the control account.
vi. An invoice for £456 had been entered in the purchase daybook as £654.
vii. A cash receipt from a credit customer for £345 had been entered in the cashbook as £245.
viii. The purchase daybook had been overcast by £1,000.
ix. The bank balance of £1,200 had been included in the trial balance, in error, as an overdraft.
x. The bookkeeper had been instructed to write off £500 from customer Y‟s account as a bad debt, and to reduce the provision for doubtful debts
by £700. By mistake, however, he had written off £700 from customer Y‟s account and increased the provision for doubtful debts by £500.
xi. The debit balance on the insurance account in the nominal ledger of £3,456 had been included in the trial balance as £3,546.
Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the sales ledger control account with the sales ledger balances, and the
purchase ledger control account with the purchase ledger balances. What further action do you recommend?
(25 marks)
QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel Services, as radio and television suppliers and repairers, sharing
profits and losses in the ratio one half, one third and one sixth, respectively. Val Vez works full-time in the business with responsibility for general
administration for which she receives a partnership salary of £4,000 per annum.
All partners receive interest on capital at 5% per annum and interest on any loans made to the firm, also at 5% per annum.
It also had been agreed that Val Vez should receive not less than £4,000 per annum in addition to her salary. Any deficiency between this guaranteed
figurer and her actual aggregate of interest on capital, plus residual profit (or less residual loss) less interest on drawings, is to be borne by Dyo and UII
in the ratio in which they share profits and losses; such deficiency can be recouped by Dyo and UII at the earliest opportunity during the next two
consecutive years provided that Val Vez does not receive less than the guaranteed minimum described above. During the year ended 30 September
1983, Dyo and UII had jointly contributed a deficiency of £1,500.
Radtel Services rents two sets of premises - one, a workshop where repairs are carried out, the other, a shop from which radio and television sets are
sold. The offices are situated above the shop and are accounted for as part of the shop.
The workshop and shop are regarded as separate departments and managed, respectively, by Phughes and Sokkitt who are each remunerated by a basic
salary plus a commission of one ninth of their departments‟ profits after charging their commission.
£ £
Stocks at 1 October 1993:
Shop (radio and television sets) 19,750
Workshop (spares, components etc.) 8,470
Purchases:
Radio and television sets 155,430
Spares, components etc. 72,100
Turnover:
Sales of radio and television sets 232,600
Repair charges 127,000
Wages and salaries (employees):
Shop and offices 54,640
Workshop 18,210
Prepaid expenses (at 30 September 1984) 640
Accrued expenses (at 30 September 1984) 3,160
Provision for doubtful debts at 1 October 1983 920
FINANCIAL ACCOUNTING 1
Lesson Seven 426
£525,590 £525,590
1) Manager‟s commissions.
2) Partnership salary (Vez).
3) Interest on partners‟ capital accounts (these have not altered during the year).
4) Interest on partners‟ drawings; Dyo £70; UII £30; Vez £20.
5) Closing stocks: shop £31,080; workshop £10,220.
6) Provision for doubtful debts at 30 September 1984, £540.
7) Residual profits/Losses.
N.B. Loan interest and the movement in the provision for bad debts are regarded as „shop‟ items.
FINANCIAL ACCOUNTING 1
Lesson Seven 428
Required:
a) Prepared columnar departmental trading and profit and loss accounts and a partnership appropriation account for he year ended 30
September 1984 and the partnership balance sheet at that date. (21 marks)
b) Complete the posting of the partners‟ current accounts for the year. (4 marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife keeps some accounting records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:
£
Assets
Plant and equipment: cost 12,600
Depreciation to date 5,800
Motor Van: cost 9,000
Depreciation to date 6,500
Stock of materials 14,160
Debtors 9,490
Rent of premises paid in advance to 30 September 1997 750
Insurance paid in advance to 31 December 1997 700
Bank balance 1,860
Cash in hand 230
Liabilities
Creditors for supplies 3,460
Telephone bill owing 210
Electricity owing 180
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998 are as follows:
1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance with a full year‟s charge in the year of purchase.
2) The new motor vehicle was purchased on 1 January 1998. Ernie‟s depreciation policy is to charge depreciation at 25% per annum on the
straight-line basis with a proportionate charge in the year of purchase but not in the year of sale.
3) The rent of the premises was increased by 20 % from 1 October 1997.
4) The loan of £10,000 was obtained from Ernie‟s brother on 1 April 1998. It carries interest at 10% per annum, payable on 30 September and 31
March.
5) At 30 June 1998, Ernie owed the following amounts:
£
Suppliers 4,090
Telephone 240
Electricity 220
Miscellaneous expenses 490
6) At 30 June 1998, amounts due from customers totaled £10,860. Of this amount, Ernie considered that debts totaling £1,280 were bad and
should be written off.
7) Stock of materials at 30 June was £12,170
8) Ernie agreed to pay his wife £5000 for her assistance with his office work during the year. This amount was actually paid in August 1998.
Required:
Prepare Ernie‟s trading profit and loss account for the year ended 30 June 1998 and a balance sheet as at that date.
FINANCIAL ACCOUNTING 1
Lesson Eight 430
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on the stock exchange.
Share capital of a company.
The owner‟s interest in a limited company consists of share capital. The share capital is divided into shares. The investor will then pay for and be issued
with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a share capital of Sh. 200,000, it may decide
to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
FINANCIAL ACCOUNTING 1
Lesson Eight 432
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have been issued, Although the firm requested
the shareholders to pay 80p per share, the shareholders were able to pay 50p per share.
Required:
Determine the:
Authorized share capital
Issued share capital
Called up share capital
Uncalled up share capital
Paid up share capital
FINANCIAL ACCOUNTING 1
Lesson Eight 434
The principal distinctions between unlimited partnerships and limited companies are:
FINANCIAL ACCOUNTING 1
Lesson Eight 436
Trading, profit and loss and Appropriation Account for the year ended 31.12
£ £ £
Sales x
Less Returns inwards (x)
x
Less Cost of Sales
Opening Stock x
Purchases x
Add Carriage in x
x
Less purchase returns (x) x
x
Less Closing stock (x) (x)
Gross Profit x
Add incomes x
Discount received x
Profit on disposal (sale of Assets) x
Income from investment (can also be shown below) x
Other incomes e.g. interest received from bank x
x
Less Expenses x
Other expenses x
Directors salaries/fees/---- x
Audit fees x
Debenture Interest x
Amortization of good will (x)
Operating profit for the period x
Add investment income x
Profit before tax x
Taxation: Corporation tax x
Transfer to deferred tax x
Under or over provision x (x)
Profit after tax x
Less: transfer to the general reserve (x)
x
Less: Dividends
Preference dividend: Interim paid x
Final proposed x
x
Ordinary dividend: Interim paid x
Final proposed x (x)
Retained profit for the year x
Retained profit b/f x
Retained profit c/d x
B Limited
Balance sheet as at 31.12………
£ £ £
Non current Assets
Land & Building x (x) x
Plant and Machinery x (x) x
Fixtures, Furniture & Fittings x (x) x
Motor vehicle x (x) x
x x x
Intangible Assets
Goodwill x (x) x
Copyrights, patents x (x) x
x x
(Longterm) Investments (mkt value sh x) x
x
Current Assets
Stock x
Debtors x
Less provision for bad debts (x) x
Prepayments x
(Short term) Investments x
Cash at bank x
Cash in hand x
x
Current liabilities
FINANCIAL ACCOUNTING 1
Lesson Eight 438
Bank overdraft x
Creditors x
Accruals x
Interest payable(debenture interest) x
Tax payable x
Dividends payable x (x) x
x
Financed by
Authorized share capital x
100,000 ordinary shares of £1 each x
100,000 preference shares of £1 each x
(x)
Issued and Fully paid x
80,000 ordinary shares of £1 each
50,000 10% preference shares of £1 each x
x
Capital Reserves
Share premium x
Revaluation Reserve x
Capital Redemption Reserve x x
Revenue Reserves
General Reserve x
Profit and loss A/C x x
x
Deffered tax A/C x
Non Current Liabilities
10% debenture x
Other Long term Loans x x
x
Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in relation to audit and accountancy is an
expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an expenses and unpaid amount are shown as
current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is a separate legal entity unlike for sole
traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous period, transfer to deferred tax corporation tax
for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000,
which the company pays and at the end of the year 2000, the company estimates that the tax liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax).
DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----
Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.
FINANCIAL ACCOUNTING 1
Lesson Eight 440
CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of capital reserves are:
Share Premium: A share premium arises when accompany issues shares at a price that is more than the par value. The share Premium may be applied
in:
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000 £1.5) 150,000
Cr Ordinary shares capital (100,000 £1) 100,000
Cr Sahre Premium A/C (100,000 £0.5) 50,000
Issue of shares at a premium of £0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. When company sills it‟s property to
realize the gain, the amount is transferred to the Profit and Loss Account.
Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without issuing new shares. The transfer is made
from either the share premium or the profit and loss account.
REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. Transfers are made from the Profits to the
General reserves to provide for expansion or purchase of non current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or not. A debenture may either be
redeemable of irredeemable. Redeemable is repayable at or by a particular date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium, balance of retained profits of the General
Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. In a bonus issue the
shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share premium A/C of £50,000. It issues some
bonus shares to existing shareholders at a rate of 1 share for every 5shares held. This amount is to be financed by the share premium. The entries will be
as follows:
Shares to be issued:
100,000 1 =20,000
5
Rights Issue
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights are issued the shareholders have 2
options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by the company.
Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The balance on the share premium is £60,000. Additional capital is raised
by way of a right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price of £2.5 per share.
FINANCIAL ACCOUNTING 1
Lesson Eight 442
Required:
The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and the relevant balance sheet extract.
Shares to be issued
100,000 2 =40,000 shares
5
Dr cash book [40,000 £2.5 ] £100,000
Cr Ordinary share capital [40,000 £2 ] £80,000
Cr Share Premium [40,000 £0.5 ] £20,000
The following examples will illustrate the preparation of final Account for companies.
Example 8.1
Just before you launch yourself into the question that follows remember that everything you have learnt about double entry bookkeeping and the
presentation of year end accounts is valid in the context of companies, subject only to the points we have added in this session.
£ £
Issued share capital (ordinary shares of £1 each) 42,000
Leasehold properties, at cost 75,000
Motor vans, at cost (used for distribution) 2,500
Provision for depreciation on motor vans to 31 March 19X7 1,000
Administration expenses 7,650
Distribution expenses 10,000
Stock, 31 March 19X7 12,000
Purchases 138,750
Sales 206,500
Directors‟ remuneration (administrative) 25,000
Rents receivable 3,600
Investments at cost 6,750
Investment income 340
7% Debentures 15,000
Debenture interest 1,050
Bank interest 162
Bank overdraft 730
Debtors and creditors 31,000 24,100
Interim dividend paid 1,260
Profit and loss account, 31 March 19X7 17,852
311,122 311,122
Required:
A profit and loss account for the year ended 31 March 19X8:
A balance sheet at that date. (22 marks)
FINANCIAL ACCOUNTING 1
Lesson Eight 444
Solution:
Transit Ltd
Profit and Loss A/C for the year ended 31.3.19X8
£ £
Gross profit 72,450
Profit on disposal of van 190
Rent Receivable 3,600
76,240
Less: Expenses
Depreciation on motor vans 500
Administration expenses 32,650
Distribution expenses 10,000
Debenture interest 1,050
Bank interest 162 (44,362)
Trading profit for the year 31,878
Add investment income 340
Profit before tax 32,218
Taxation (12,700)
Profit after tax 19,518
Less: Dividends
Interim paid 1,260
Final proposed 4,200 (5,460)
Retained profit for the year 14,058
Retained profit b/f 17,852
Retained profit c/d 31,910
Transit Ltd
Balance sheet as at 31.3.19X8
£ £ £
Non-Current Assets
Leasehold properties 75,000 - 75,000
Motor vans 2,400 (960) 1,440
77,400 960 76,440
Investments 6,750
83,190
Current Assets
Stock 16,700
Debtors 31,000
47,700
Current liabilities
Bank overdraft 980
Creditors 24,100
Tax payable 12,700
Proposed dividends 4,200 (41,980) 5,720
88,910
Financed by:
Authorized issued and fully paid
42000 ordinary share of £1 42,000
Revenue Reserves
Profit and Loss A/C c/f 31,910
73,910
Non-Current liabilities
7% Debentures 15,000
88,910
Workings
Sales 206,500
Less: Cost of sales
Opening stock 12,000
Purchases 138,750
150,750
FINANCIAL ACCOUNTING 1
Lesson Eight 446
Motor vehicle
Bal b/f 2,500 Disposal 900
Disposal 550
Cashbook 250 Bal c/d 2,400
3,300 3,300
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5
£ £
Share capital authorized and issued:
Required:
FINANCIAL ACCOUNTING 1
Lesson Eight 448
With particular emphasis on presentation, prepare a trading and profit and loss account for the year 19X5, and a balance sheet at 31 December 19X5,
ignoring taxation. (24 marks)
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
£ £
Sales 142,770
Opening stock 13,930
Purchases 108,440
122,370
Less: Closing stock 14,600
Cost of goods sold 107,770
35,000
Directors‟ remuneration 4,000
Wages and salaries 13,127
Motor and delivery expenses 3,258
Rates (700 - 140) 560
Legal expenses (644 - 380) 264
General expenses 5,846
Bad debts 1,150
Loss on disposal 80
Depreciation 3,019
Net profit 31,304
3,696
Proposed dividend 4,000
(304)
Retained profit brought forward 2,430
Retained profit carried forward 2,126
FINANCIAL ACCOUNTING 1
Lesson Eight 450
£ £ £
Non-Current Assets
Freehold properties 59,380 ---- 59,380
Motor vans 15,095 (9,294) 5,801
74,475 (9,294) 65,181
Current Assets
Stock 14,600
Debtors and prepayments, less provision for
doubtful debts 11,110
Cash at bank 6,615
32,325
Current liabilities
Creditors 11,380
Proposed dividends 4,000
15,380
16,945
82,126
Share capital
Ordinary shares of £1 each 80,000
Profit and loss account 2,126
82,126
Workings
Bad debts
£ £
Debtors 1,075 Balance b/f 275
Balance c/f 350 Profit and loss account 1,150
1,425 1,425
Motor vans
£ £
Balance b/f 15,000 Disposals 680
Additions 775 Balance c/f 15,095
15,775 15,775
Disposals
£ £
Motor vans 680 Provision for depreciation 475
Proceeds 125
Loss on capital 80
680 680
Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local farmers.
Services offered include the collection of produce, the use of rapid freezing equipment, storage of the frozen produce and transport from frozen storage
in refrigerated vehicles to any point within the country. Orders for these services are secured by the company‟s sales staff.
The company‟s revenue consists of charges for transport and freezing, and of storage rentals. Customers may hire storage space either on a long-term
contract basis at advantageous charges (payable in advance) or on a casual basis (invoiced monthly).
A considerable amount of electricity from the public supply is used by the company in the freezing and storage operations. In the event of a sudden
failure in this supply, the company is able to generate its own emergency supplies from standby generators kept for this purpose. An insurance policy
has been taken out to protect the company against the claims which would arise should any of the frozen produce deteriorate as the result of power or
equipment failure.
At the end of the company‟s financial year ended 30 September 1982, the assistant accountant extracted the following balances from the ledgers.
FINANCIAL ACCOUNTING 1
Lesson Eight 452
Assets Account £
Land and buildings (at cost) 390,000
Plant (at cost) 271,900
Vehicle (at cost) 82,600
Provision for depreciation (at 1 October 1981):
Land and buildings 39,600
Plant 144,800
Vehicles 27,050
Stock of consumable stores (at 30 September 1982) 23,449
Debtor – for rentals 18,204
for charges 2,332
Bank 30,710
Cash 1,103
Liability Accounts
Trade Creditors 7,390
7% Debentures 2004/2012 80,000
Ordinary Share Capital (see note 7) 200,000
General reserve 25,000
Unappropriated profit (at 1 October 1981) 108,284
Share Premium 15,000
Revenue Accounts
Storage rentals – long term contracts 302,090
Casual 85,063
Freezing charges 112,810
Transport charges 90,107
Expense Accounts
Wages, salaries and related expenses 128,004
Rates 79,112
Electricity 76,860
Transport costs 43,271
Repairs 30,319
Consumable stores 29,800
Postages, stationery, telephones 15,604
Insurance premium 7,800
Other Accounts
Suspense (credit balance) 8,650
The insurance company has admitted liability under the policy but no further ledger entries have as yet been made.
During the 1981-82 financial year, the company replaced one of its refrigerated vehicles, which has originally cost £16,400 and on which £13,120 had
been provided as depreciation to date of disposal. A trade-in (part exchange) allowance of £6,000 was granted in respect to this vehicle. A replacement
vehicle was acquired at a list price of £27,000. The entries relating to the disposal of the old vehicle have not yet been made, except that the trade-in
allowance has been debited to Vehicles and credited to Suspense. The balance of the price of the new vehicle has been paid by cheque and debited to
Vehicles account.
It is the company‟s policy to provide for depreciation on a straight line basis calculated on the cost of fixed assets held at the end of each financial year
and assuming no residual value. Annual depreciation rates are:
%
Building 2
Plant 10
Vehicles 25
The „Buildings‟ content of the item Land and Buildings included in asset account balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following items:
£
Storage rentals received in advance 25,631
Insurance premium prepaid 600
Wages and Salaried accrued 1,920
Rates prepaid 28,820
FINANCIAL ACCOUNTING 1
Lesson Eight 454
Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share. The directors have recommended a dividend
for the year of £0.12 per share.
Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez p.l.c.for the year ended 30 September 1982 and a Balance Sheet at
that date. All workings must be shown. (31 marks)
Open the Suspense account and post the entries needed to eliminate the opening credit balance.
(2 marks)
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
£ £
Revenue
Storage rentals – long term (302,090 – 25631) 276,459
casual 85,063
Freezing charges 112,810
Transport charges 90,107
564,439
Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920) 129,924
Rates (79,112 – 28,820) 50,292
Electricity (76,860 – 5,757) 82,617
Transport costs (43,271 + 4,131 + 9,972) 57,374
Repairs (30,319 – 9,972) 20,347
Consumable stores (29,800 – 4,131) 25,669
Postages, stationery, telephones 15,604
Insurance premiums (7,800 - 600) 7,200
1,2 *Depreciation 43,540
Debenture Interest 5,600
Sundries 9,176
447,343
117,096
5 Profit (less loss) on disposal of fixed assets 1,520
Net Profit For The Year 118,616
Retained profit brought forward 108,284
Distributed profit 226,900
Less:
Ordinary dividends proposed 48,000
Retained profit carried forward 178,900
Workings:
Land Buildings Plant Vehicle Total
Fixed Assets: £ £ £ £ £
Balance 1 October 1981 270,000 120,000 271,900 55,600 717,500
(veh 82,600 – (6,000 + 21,000))
Acquisitions (21,000 – 6,000) 27000 27,000
Disposals (26,000) (16,400) (42,400)
FINANCIAL ACCOUNTING 1
Lesson Eight 456
Depreciation
-rate - 2% 10 25
£ £ £ £ £
-current year charge - 2,400 24,590 16,550 43,540
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a transport cost, thereby increasing that figure to £73,924.
£ £ £ £ £
Written down values at 30
September 1982 270,000 78,000 97,310 35,720 481,030
FINANCIAL ACCOUNTING 1
Lesson Eight 458
Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£ STRATHMORE UNIVERSITY ● STUDY PACK
42,000
148,590
459 Company Accounts
Suspense
£ £
Fixed Asset Disposals:
` Plant 4000 Balance b/d 8650
Vehicle 6000 Debtors (insured loss) 1350
10000 10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family. The following trial balance was extracted from the books of the
company as at 31 March 1993:
Sh. Sh.
Freehold property, at cost (land Sh. 75,000) 125,000
Plant, at cost 130,000
Depreciation 62,000
Motor vehicle, at cost 53,000
Depreciation – motor vehicle 30,500
Fittings and fixtures, at cost 38,600
Depreciation – fittings and fixtures 11,790
20,000 Ordinary shares of Sh. 10 each authorized, issued and
fully paid 200,000
Share premium 50,000
General reserve 120,000
Interim dividend paid 16,000
Cash at bank and in hand 33,570
Accounts receivable and payable 130,540 57,430
15% Debentures 100,000
Discount received 3,640
Profit and loss account 1 April 1992 103,870
Purchases of raw materials 942,380
Sales of finished goods 1,254,760
Inventories 1 April 1992:
Raw materials 33,060
Work in progress 57,660
Finished goods 107,860
Provision for doubtful debts 6,400
Bad debts 4,890
FINANCIAL ACCOUNTING 1
Lesson Eight 460
Additional information:
Depreciation is to be provided for the year using the reducing balance method and applying rates of 15% on plant, 25% on motor vehicle and
10% on fittings and fixtures.
Building is to be depreciated at the rate of 4% using the straight-line method. (Assume the whole building is used for manufacturing purposes).
Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.
Light and water, insurance and general expenses are to be apportioned in the ratio 4:1 between factory and administrative overheads.
Sh.
Electricity and wateer accrued was 860
Insurance prepaid was 270
Rates prepaid were 780
Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March 1983 and a Balance Sheet as at that date.
(25 marks)
FINANCIAL ACCOUNTING 1
Lesson Eight 462
Trading, Profit And Loss Account For The Year Ended 31 March 1993
Shs Shs
Sales 1,254,760
Less: Closing stocks (1,360)
1,253,400
Opening stock 107,860
Goods manufactured 902,854
1,010,714
Less: Closing stocks (124,320) 886,394
367,006
Discount received 3,640
370,646
Debenture interest 15,000
Provision for bad debts 6,654
Depreciation
- Motor vehicle 5,625
- Fittings and fixtures 2,681
Dividend
- Interim 16,000
- Fianl 24,000 40,000
Retained Profit for the year 49,150
Retained Profit brought forward 103,870
Retained Profit carried forward 153,870
FINANCIAL ACCOUNTING 1
Lesson Eight 464
Current Assets
Stocks
- Raw materials 139,630
- work in progress 82,450
- finished goods 124,320 346,400
Debtors, less provisions 117,486
Cash at bank and in hand 33,570
Prepaid expenses 1,050
498,506
Current Liabilities
Creditors 57,430
Accruals 15,860
Dividend proposed 24,000
97,290
Net current assets 401,216
623,020
Financed by:
Authorized, and issued share capital:
20,000 Ordinary shares each Sh. 10 200,000
Reserves:
Share Premium 50,000
General Reserve 120,000
Profit and Loss account 153,000 323,020
523,020
Workings:
FINANCIAL ACCOUNTING 1
Lesson Eight 466
Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:
Sale of Shares
When shares are sold in exchange for lump sum cash payment and this is at per value, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
When shares are sold in exchange for lump sum cash payment and this is at a premium, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium
Sale of shares which are to be paid for in installments are normally dealt with as follows:
The number of installments may vary from 2 – 4. Each installment is collected through a comprehensive set of processed(called a stage). The 4 possible
stages are:
Application stage
For each stage, an account is opened. This account
Allotment stage
must close at the end of the stage. (The application
1st Call stage
stage & allotment stage may be dealt with in a single
2nd Call stage
account called the application/ allotment A/C)
FINANCIAL ACCOUNTING 1
Lesson Eight 468
Application Stage
In this stage, the company invites members of the public to send in applications for share they (the public) are interested in purchasing.
The application firms must be accompanied by the 1 st installment money when the public respond to the company‟s offer.
When the company requests members of the public to send in application forms & application money it will make the following entries in its books:
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application With deficit
If there is an over-subscription, then the excess applications may either be rejected outright and the applicants‟ money refunded, or applications
awarded on a pro-rata basis. (i.e. a lower number of shares allotted compared to the number applied for)
If outright rejection, the company will:
DEBIT: Application
CREDIT: Cashbook With refunded money
If pro-rata issue, the company will:
DEBIT: Application
CREDIT: Allotment With amount required to close the
This marks the end of the application stage. application A/C.
Allotment Stage
In this stage, the company selects the applicants and informs them of their allotment. It also requests them to bring in a second installment. As it
requests for the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the company, will in its books: -
DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the account has closed by this stage, the stage is deemed to be over.
When a debtor for share money (calls – in –arrears) does not pay up his dues, his shares will be cancelled and any money he previously gave the
company forfeited (i.e. not refunded to him). This is known as Share Forfeiture. The entries to be made when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.
If resold at per:
FINANCIAL ACCOUNTING 1
Lesson Eight 470
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale will be expressly illegal unless:
Amounts collected from previous allotee plus an amount collected from current allotee equals or is greater than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.
Last entry in this exercise is to transfer any balance on the share forfeiture A/C to Share Premium A/C as follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.
The excess application monies received from the successful applicants is not to be refunded but is to be applied to reduce the amount payable on
allotment.
The calls were made and paid in full with the exception of one member of one member holding 5,000 shares who paid neither the first nor the second
call and another member who did not pay the second call on 1,000 shares. After requisite action by the directors the shares were forfeited. They were
later reissued at a price of Sh.8 per share.
Required:
The necessary ledger accounts to record these transactions (15 marks)
(Total: 20 marks)
Solution:
Memorandum of association explains the relationship between the company and the outside world. It shows the object of the company, the name,
address, the authorized share capital, its location (its registered office) and the date of incorporation.
Articles of association state the rules under which the company will operate e.g. the number of directors, the structure, and meetings. It explains the
relationship between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is registered by the registrar of companies.
Application A/C
Sh. Sh.
Cashbook 130,000 Cashbook 1,630,000
OSC 1,000,000
Allotment 500,000
1,630,000 1,630,000
Allotment A/C
Sh. Sh.
OSC 3,000,000 Application 500,000
Allotment Cashbook 2,500,000
3,000,000 3,000,000
1st Call
Sh. Sh.
OSC 4,000,000 Calls in arrears 20,000
Cashbook 3,980,000
4,000,000 4,000,000
FINANCIAL ACCOUNTING 1
Lesson Eight 472
2nd Call
Sh. Sh.
OSC 1,990,00 Calls in arrears 2,000
Cashbook 1,988,000
1,990,000 1,990,000
Share Premium
Sh. Sh.
Bal c/d 1,630,000 Share forfeiture 1,630,000
Calls in Arrears
Sh. ` Sh.
1st Call 20,000
2nd Call 2,000 Share forfeiture 22,000
22,000 22,000
FINANCIAL ACCOUNTING 1
Lesson Eight 474
LIQUIDITY RATIOS.
These measure the firm‟s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been financed by non-owner supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various assets to generate sales revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses various funds to generate profits or returns. They also measure the
management‟s ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and returns expected by the owners of the firm. They also try to look at
the overall performance of the firm and going concern of the firm.
The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992
Sh Sh
Sales 850,000
Less: Cost of Sales
Opening stock 99,500
Purchases 559,500
659,000
Less: Closing stocks (149,000) (510,000)
Gross profit 340,000
Less expenses
Selling and distribution 30,000
Depreciation 10,000
Administration expenses 135,000 (175,000)
Earnings before interest & taxes 165,000
Interest (15,000)
Earnings before tax 150,000
Tax @ 50% 75,000
Less ordinary dividend 75,000
(0.75 per share)
Retained profit for the year (15,000)
60,000
ABC
Balance Sheet as at 31 December 1992
Additional Note
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
The higher the ratio then the more liquid the firm is.
= 0.78 : 1
this is a more refined ration that tries to recognize the fact that stakes may not be easily converted into cash. The higher the ratio, the better for the firm
as it means an improved liquidity position.
FINANCIAL ACCOUNTING 1
Lesson Eight 476
Cash Ratio
= Cash + Marketable Securities
Current Liabilities
= 30,000 = 0.23 : 1
130,000
= 0.23 : 1
This ratio assumes that stakes may not be converted into cash easily and the debtors may not pay up their accounts on time. The higher the ratio, the
better for the firm as the Liquidity position is improved.
= 0.27 : 1
The higher the ratio the better for the firm and therefore the improved Liquidity position.
GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able to pay up its debts). The more debts a business has (non owner
supplied funds) the higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets
This ratio measures the proportion of total assets financed by non owner supplied funds. The higher the ratio, the higher the financial risk .
= 230,000 = 0.4
580,000
= Total Liabilities
Networth (share holders funds)
= 230,000 = 0.66
350,000
40% is supplied by non-owners
This ratio measures how much has been financed by the non-owner supplied funds in relation to the amount financed by the owners i.e. for every
shilling invested in the business by the owners how much has been financed by the non-owner supplied funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the creditor have put in 67 cents.
The higher the financial risk.
= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner supplied funds.
The higher the ratio, then the higher the financial risk.
ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250
= 4.1 times
FINANCIAL ACCOUNTING 1
Lesson Eight 478
This is the number of times stock has been converted to sales in a financial year. The higher the ratio the more active the firm is.
An alternative formula is
= Sales
Closing Stock
Debtors Turnover
= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit
The higher the ratio, the more active the firm has been (we had debtors over 10 times to generate the sales)
Note
Average Collection Period = 360
Debtors Turnover
= 360 = 34 days
10.625
This measure the number of days it takes for debtors to pay up. The lesser the period, the better for the firm as it improves the liquidity position.
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
130,000
= 42 times
The ratio tries to measure how many times we have creditors during a financial period. The lesser the ratio the better.
The ratio measures the efficiency with which the firm is using its fixed/ Non Current Assets to generate sales.
The higher the ratio the more active the firm.
= Sales
Total Assets
= 850,000
580,000
= 1,046 times
Measures the efficiency with which the firm is using its total assets to generate sales.
PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales 850,000
The higher the margin, the more profitable the firm is.
FINANCIAL ACCOUNTING 1
Lesson Eight 480
The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.
= 75,000 = 13%
580,000
Shows how efficient the firm has been in using the total assets to generate returns in the business.
= 750,000 = 17%
450,000
How efficient the firm has been in using the net assets to generate returns in the business.
Return On Equity
= Earnings after tax
Networth
= 75,000
850,000
= 21%
NOTE
The higher the ratio the more efficient is the firm.
EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.
= 75,000
20,000
= 3.75
This is the return expected by an investor for every share held in the firm.
Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC‟S shares is Sh20/Share.
= 3.75 100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in the business.
= 15,000
20,000
This is the amount expected by an investor for every share held in the firm.
NOTE
The higher the amounts, the better for the firm.
FINANCIAL ACCOUNTING 1
Lesson Eight 482
DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company‟s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same industry.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
Expenses
Distribution costs 200 150
Administrative expenses 290 250
Interest paid 10 400
500 800
Profit before tax 500 400
Taxation 120 90
Net profit for the period 380 310
FINANCIAL ACCOUNTING 1
Lesson Eight 484
Required:
a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability, liquidity and management of
the elements of working capital. Show all workings.
(8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies as regards their profitability, liquidity and working capital
management. (8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the implications of this for the two companies?
(4 marks)
(20 marks)
Solution:
FINANCIAL ACCOUNTING 1
Lesson Eight 486
PROFITABILITY
Asset turnover
Sales 4000 = 2.1 times 6000 = 0.9 times
Capital employed 1950 6890
LIQUIDITY
Current ratio
Current assets 1350 = 1.1:1 1880 = 1.9:1
Current liabilities 1200 990
Quick ratio
Current assets – stock 950 = 0.8:1 1080 = 1.1:1
Current liabilities 1200 990
Gearing
Long – term loans nil = nil 4000 = 58%
Capital 1950 6890
Interest cover
Profit before interest and tax 510 = 51 times 800 = 2 times
WORKING CAPITAL
MANAGEMENT 800 365 = 73 days 900 365 = 55 days
Debtors days 4000 6000
Trade debtors 365 days
Sales
Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing policy. Omega‟s net margin is lower than Zeta‟s. Omega‟s expenses
are therefore proportionally higher. It should be noted that Omega‟s bottom line profit is reduced significantly by the interest charge.
Return on Omega‟s capital is around half of Zeta‟s. Omega has a higher fixed asset base due in part to a revaluation. It may be that a revaluation of
Zeta‟s assets will partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both companies‟ quick ratios are much closer, Zeta‟s liquidity does appear
to be an issue especially as there is no cash at hand. It would be wise to examine projected cashflows to see how readily Zeta‟s profits will improve this
situation. As Zeta has no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market which can be subject to obsolescence.
Zeta‟s creditor and debtor days are a cause for concern. Debtors should be collected within 60 days if not sooner. 60 day collection would improve cash
flow by over £140,000 reducing the debtors balance to £658,000(60/73 £800,000).
FINANCIAL ACCOUNTING 1
Lesson Eight 488
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks damaging the goodwill it has with its suppliers. Paying creditors within 60
days would have an adverse effect on cash flow of over £270,000. The creditors balance would be £527,000 (60/91 £800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega‟s gearing means that should profits fall they may not be in a position to pay the
loan interest. Zeta‟s capital is entirely share capital and so a fixed return is not required.
Omega‟s loan appears to be fixed rate. This means that in times of falling interest rates Omega will have higher interest costs than say, Zeta, if Zeta
borrowed the same amount. The converse is true in times of rising interest rates.
REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31 October 1999.
Sh. Sh.
Authorized and issued capital 40000000
Share premium 500000
8% debenture stock 10000000
Profit and loss stock 5500000
Motor vehicles at cost 16500000
Provision for depreciation on motor vehicle 3400000
Plant and machinery at cost 25800000
Provision for depreciation on plant and machinery 6300000
Land buildings at cost 30000000
Stock in hand 1 November 1998 – Finished goods 420000
– Raw materials 380000
– Work-in-progress 560000
Sh. Sh.
Trade debtors 7360000
Office furniture and equipment at cost 890000
Provision for depreciation on office furniture and equipment 185000
Trade creditors 1000000
Purchase of raw materials 9500000
Sales of finished goods 28550000
Direct wages 1350000
Direct expenses 395000
Factory expenses 290000
Indirect materials 350000
Factory insurance 150000
Sales room expenses 485000
Administration expenses 620000
Office salaries and wages 840000
Vehicles running expenses 656000
Bad debts written-off 640000
Balance at bank – overdrawn 1175000
96610000 96610000
FINANCIAL ACCOUNTING 1
Lesson Eight 490
Notes:
Closing stock includes
– Finished goods
– Raw materials
– Work-in-progress
Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a transfer of Sh. 2000000 to a general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on furniture and equipment, plant and machinery and motor vehicles
respectively.
The overdraft interest of Sh. 725000 was communicated to the company by the bank on 5 November 1999 and therefore it has not been posted in the
cash book.
Required:
Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
(12 marks)
Balance sheet as at 31 October 1999. (8 marks)
(Total: 20 marks)
QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31 October 1998.
Sh,’000’ Sh,’000’
Authorized and issued capital (shares of Sh. 20 each fully paid) 30,000
Share premium 350
10% premium 3,500
General reserve 2,000
Profit and loss account 1 November 1997 2,850
Motor vehicles at cost 3,500
Provision for depreciation 265
Freehold property 44,500
Trade debtors 1,375
Trade creditor 460
Purchases and sales 95,650 127,450
Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no entries were made in the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October 1998 but no entries were made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000 respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and 20% on cost respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a transfer of Sh.2,500,000 to the general reserve.
10. The debenture interest has not yet been paid.
Required:
1. Trading, profit and loss account for the year ended 31 October 1998. (13 marks)
2. Balance sheet as at 31 October 1998. (7 marks)
(Total: 20 marks)
FINANCIAL ACCOUNTING 1
Lesson Eight 492
Current assets
Stock 12,000 15,000
Debtors 10,500 14,000
Cash 1,400 2,000
23,900 31,000
Current liabilities
Trade creditors 6,800 9,400
Corporation tax 3,400 5,000
Proposed dividend 4,000 6,000
14,200 20,400
The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996 were:
Required:
a) Calculate the following accounting ratios for both years:
The gross profit percentage
The current ratio and the quick ratio (or acid test)
Debtors‟ collection period in days
Trade creditors‟ payment period in days (based on purchases figures which are to be calculated)
Gearing ratio.
b) Show you full workings. (10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them with those for 1995.
(5 marks)
d) State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the
change about. (2 marks)
e) State the extent to which you agree or disagree with the following and give brief reasons for your answers.
f) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these
ratios are the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed.
(3 marks)
(20 marks)
QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1 each at 120p per share, payable as to 50p on application (including
the premium), 40p on allotment and the balance on 1 May 19X1.
FINANCIAL ACCOUNTING 1
Lesson Eight 494
The lists were closed on 10 February 19X1, by which date applications for 70,000 shares had been received. Of the cash received, £4,000 was returned
and £6,000 was applied to the amount due on allotment, the balance of which was paid on 16 February 19X1. All shareholders paid the call due on 1
May 19X1, with the exception of one allotee of 500 shares. These shares were forfeited on 29 September 19X1 and reissued as fully paid at 80p per
share on November 19X1.
You are required to write up the necessary accounts, excluding those relating to cash, to record these transactions.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of Shs.5,000.00. On 2 January 2002, this assistant did not report for work
and it was found that he had left, taking with him the balance in the till. It had been Pesa Nyingi‟s practise to bank each Monday morning the balance in
the till resulting from the previous week‟s transactions. No float was maintained. The only records kept, apart from the bank statement, were details of
sales on credit and unpaid invoices for goods.
Stock 688,000.00
Creditors 988,000.00
Bank 276,000.00
Debtors 344,000.00
Cash 228,000.00
Accrued expenses 100,000.00
Fixtures and Fittings 1,000,000.00
Receipts 180,000.00
Banking from debtors cheques 4,116,000.00
Cash 4,296,000.00
Payments 3,748,000.00
Creditors for goods 232,000.00
Rent and expenses 3,980,000.00
FINANCIAL ACCOUNTING 1
Lesson Eight 496
Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00 for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs. 13,960,000. An amount of Shs. 336,000.00 was still outstanding.
Creditors for goods have always been paid by cheque. Unpaid invoices on 31 December 2001 amounted to Shs. 1,120,000.00. Creditors for expenses
were Shs. 800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned against a cash receipt of Shs. 48,000.00. The receipt has not been
recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
A depreciation charge of 20% is to be charged on the value outstanding on the fixtures and fittings at the end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact has not yet been reflected in the bank statement.
Assume a 50 week year
Required:
a) Prepare workings showing your calculation of the amount of the theft. (8 marks)
b) Prepare a trading, profit and loss account for the year ended 31 December 2001 and a balance sheet as at that date.
17 marks)
QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the following information is available.
Debit Credit
Sales Ledger balances as at 1 May 2002 1,672,000.00 114,600.00
Purchases Ledger balances as at 1 May 2002 28,000.00 747,000.00
Sales Ledger balances as at 31 May 2002 ? 67,000.00
Purchases Ledger balances as at 31 May 2002 36,500.00 ?
It has been decided to set off a debt due from a customer, A Mutiso, of Shs. 30,000.00 against a debt due to him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the total debtors on 31 May.
Required:
a) Prepare the sales ledger control account and the purchases ledger control account for May 2002 in the books of Jambo Dealers Ltd.
(14 marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers Ltd relating to the company‟s trade debtors and trade creditors.
(3 marks)
c) Briefly explain the purpose of control accounts. (3 marks)
QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year ended 30 April 2000, 2001, 2002 and balance sheet as at 30 April 1999,
2000, 2001 2002 for James Mwendapole, a sole trader.
Trading, Profit and Loss Accounts for the year ended 31 May
FINANCIAL ACCOUNTING 1
Lesson Eight 498
Current Assets
Stocks 140.00 160.00 200.00 290.00
Debtors 100.00 180.00 400.00 520.00
Balance at bank 900.00 130.00 390.00 160.00
Total Current Assets 330.00 470.00 990.00 970.00
Current Liabilities
Creditors (40.00) (80.00) (120.00) (180.00)
Loan (received on 31 May 2001) - - (500.00) (500.00)
Total Current Liabilities (40.00) (80.00) (620.00) (680.00)
Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income from his grandfather and therefore has taken no drawings from his
retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services rendered to the business by James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the rate of 8% per year.
Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following financial ratios.
Return on capital employed
Quick ratio
Stock turnover
Net Profit Margin (8 marks)
2. Use two financial ratios (not referred in (a) above) to draw attention to two aspects to the business which would appear to give cause for
concern. (6 marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue trading and whether it was a sound decision to borrow the loan.
(6 marks)
QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality wheelbarrows, Bingwa being responsible for the factory and Shabiki being
responsible for sales. Completed wheelbarrows are transferred from the factory to the warehouse at agreed prises. Bingwa and Shabiki are credited with
one third of the manufacturing profit and 10% of the trading gross profit respectively and the balance of the firm‟s profit being shared equally. All
wheelbarrows are sold at Sh. 680.00 each. No interest is credited or charged on capital accounts or drawings.
FINANCIAL ACCOUNTING 1
Lesson Eight 500
Sh. Sh.
Capital Accounts
Bingwa 482,000.00
Shabiki 507,000.00
Drawings
Bingwa 96,000.00
Shabiki 87,400.00
Freehold factory (including land Sh. 300,000.00) 708,800.00
Factory Plant at cost 326,400.00
Delivery Van at cost 82,000.00
Provision for depreciation
Freehold Factory 307,040.00
Factory Plant 110,160.00
Delivery Van 38,400.00
Stocks on 1 February 2001
Raw materials 42,000.00
Work in progress 40,200.00
Wheelbarrows (1220 at Shs. 440) 536,800.00
Sales 1,237,600.00
Return inwards 13,600.00
Purchases of raw materials 291,600.00
PAYE 8,800.00
Factory wages 165,400.00
Office wages 48,000.00
Expenses Factory 126,800.00
Office 143,400.00
Provision for unrealized stock (in warehouse) 48,800.00
Provision for doubtful debts 19,200.00
Debtors and creditors 217,600.00 109,200.00
Bank 57,200.00
2,926,000.00 2,926,000.00
Additional information:
a) 1540 wheelbarrows at Sh. 480 each were transferred to the warehouse during the year.
b) Wheelbarrows in stock being balance of the current year‟s production, were valued at agreed price of Sh. 480 each.
c) The stock of raw materials was Sh. 34,000.00 and work in progress is valued at Sh. 53,600.00
d) Accrued expenses on 31 March 2002 amounted to 62,400 (including office(Sh. 32,800.00) and prepaid rates Sh,3,200.00 (including office Shs.
1,200.00 )).
e) Provision for depreciation is to be made as follows:
Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March 2002 and a balance sheet as at that date.
(20 marks)
QUESTION FIVE
State and explain the qualities of useful financial information. (10 marks)
To what extent do International Accounting Standards help achieve these qualities. (5 marks)
(25 marks)
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
FINANCIAL ACCOUNTING 1
502 Revision Aid
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
FINANCIAL ACCOUNTING 1
504 Revision Aid
Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
DR CR
£ £
Cash at bank 1,703
Cash in hand 12
Drawings 560
Postage and stationery 129
Traveling expenses 104
Cleaning expenses 260
Sundry expenses 19
Telephone 214
Electricity 190
Motor vas 2,000
Rates 320
Fixtures ad fittings 806
Capital 2,308
Purchases 3,163
Discounts received 419
Credit sales 830
Cash sales 4,764
Discount allowed 81
Provision for depreciation:
Motor van 700
Fixtures ad fittings 250
Stock at 1 January 20X1 366
Loan - Frey 250
Debtors – Brown 12
Blue 150
Stripe 48
Creditors – Live 602
Negative _____ 64
10,207 10,207
Workings
Cash at bank £
Opening balances 672
Bankings of cash (908 + 940 + 766 + 1,031) 3,643
Capital introduced 500
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 + 38 + 20) x 90% 729
5,546
Less cheque payments (telephone, electricity, rates and van)
Payments to suppliers
(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + 187) (2,374)
1,703
Cash at Bank
£ £
Bal b/d 5 Bank 3,645
Sales (bal) 4,764 Drawings 560
Stationery 73
Travel 40
Petrol ad van 104
Sundry 19
Postage 56
Cleaner 260
Bal c/d _12
4,769 4,769
FINANCIAL ACCOUNTING 1
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Question 2
Mary Carter
Balance Sheet as at 31.12.2001
Workings
Stock: 11,000 + 34,000 – 37,000 = 8,000
Debtors: 10,000 + 51,000 – 54,000 = 7,000
Cash at bank: 5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 = 1,000
Cash hand: 3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000
Capital
Bal b/f 34,000
Add profit _5,000
39,000
Less drawings (10,000)
29,000
Profit:
Sales 60,000
Cost of sales (37,000)
Electricity (2,000)
Rates (1,000)
Wages (10,000)
Sundry expenses (2,000)
Bank interest (3,000)
Net profit 5,000
Creditors
= 12,000 + 34,000 – 36,000 = 10,000
Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.
Net profit = closing capital (net assets) – opening capital + drawings – additional capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000
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Question 4
Brian Barmouth
Trial balance as at 30 June 2000
£ £
Sales 47,600
Purchases 22,850
Office expenses 1,900
Insurance 700
Wages 7,900
Rates 2,800
Heating and lighting 1,200
Telephone 650
Discounts allowed 1,150
Opening stock 500
Return inwards 200
Returns outwards 150
Premiums 40,000
Plant and machinery 50,000
Motor vehicle 12,000
Debtors 12,500
Bank balance 7,800
Creditors 3,400
Loan – long term loan 10,000
Capital 60,000
Drawings for the year __4,000 ______
121,150 121,150
NB: The closing stock does not appear in the trial balance.
LESSON 2
Question 1
(a)
£ £
1-May Capital 5,000 1-May Store fitments 2,000
13-May Sales 200 19-May Abel 650
16-May Bruce 700 20-May Rent 200
24-May hill 200 21-May Delivery exp 50
30-May Drawings 200
30-May Wages 320
31-May Green 300
_____ 31-May Balance c/d 2,380
6,100 6,100
Check the account balances with the balances shown on the trial balance.
(d)
Dr Cr
£ £
Cash 2,380
FINANCIAL ACCOUNTING 1
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Sales 1,840
Purchases 1,750
Debtors 740
Creditors 800
Capital 5,000
Fixtures and fittings 2,000
Rent 200
Delivery expenses 50
Drawings 200
Wages _320 ____
7,640 7,640
Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
£ £ £
Sales 15,500
Less returns inwards (1,500)
150,000
Cost of sales
Opening stock 46,000
Purchases 103,500
Less returns outwards (3,500) 100,000
146,000
Less closing stock (41,000) (105,000)
Gross profit 45,000
Discount received 200
Rent received 2,000
47,200
Expenses
Salaries and wages 18,700
Office expenses 2,500
Insurance 1,100
Electricity 600
Stationery 2,400
Advertising 3,500
Telephone 800
Rates 3,000
Discount allowed __100 (32,700)
Net profit 14,500
End Papers
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Premises 80,000
Fixtures and fittings 5,000
85,000
FINANCIAL ACCOUNTING 1
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Current assets
Stocks 41,000
Debtors 4,800
Cash in hand 200
46,000
Current liabilities
Bank overdraft 12,000
Creditors 7,500 (19,500)
26,500
111,500
Capital 111,000
Add net profit 14,500
125,500
Less drawings (14,000)
111,500
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
£ £ £
Sales 9,234,000
Less: Cost of sales
Opening stock 1,816,000
Purchases 6,918,500
Add carriage inwards 42,000
6,960,500
Less returns outwards (64,000) 6,896,500
8,712,500
Less closing stock (2,239,000) (6,473,500)
2,760,500
Less expenses
Wages and salaries 1,024,000
Carriage outwards 157,000
Rent and rates 301,500
Communication expenses 62,400
Commission payable 21,600
Insurance 40,500
Sundry expenses 31,800 (1,638,800)
Net profit 1,121,700
K Smooth
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Buildings 2,000,000
Fixtures 285,000
2,285,000
Current assets
Stocks 2,239,000
Debtors 1,432,000
Bank 297,000
Cash 11,500
3,979,500
Current liabilities
Creditors (816,000) 3,163,500
5,448,500
Capital 5,088,800
Add net profit 1,121,700
6,210,500
Less drawings 762,000
5,448,500
FINANCIAL ACCOUNTING 1
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Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
£ £ £
Sales 13,090,000
Less: returns outwards __(55,000)
13,035,000
Cost of sales:
Opening stock 2,391,000
Purchases 9,210,000
Add carriage inwards ___21,500
9,231,500
Less returns outwards __(30,700) 9,200,800
11,591,800
Less closing stock (2,747,500) (8,844,300)
4,190,700
Less expenses
Wages and salaries 1,282,000
Carriage outwards 30,900
Motor expenses 163,000
Rent and rates 297,000
Telephone 40,500
Insurance 49,200
Office expenses 137,700
Sundries 28,400 (2,027,700)
Net profit _2,163,000
Skates
Balance Sheet as at 30September 2002
Non current assets £ £ £
Office equipment 625,000
Motor van 410,000
1,035,000
Current assets
Stocks 2,747,500
Debtors 1,239,000
Bank 311,500
Cash __29,500
4,318,500
Current liabilities
Creditors (937,000) 3,381,500
4,416,500
Capital 3,095,500
Add net profit 2,163,000
5,258,500
Less drawings (842,000)
4,416,500
LESSON 3
Question 1-
Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users‟ decisions taken on the basis of the financial statements. The materiality of
the omission or misstatement depends on the size and nature of the item in question judged in the particular circumstances of the case. Only items
material in amount or in nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit account, it might well be regarded as a material misstatement if these
two amounts were displayed on the balance sheet as „cash at bank £5,000‟. In other words, incorrect presentation may amount to material misstatement
even if there is no monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time to identify trends and with other enterprise‟s statements to evaluate
their relative financial position, performance and changes in financial position. It is therefore necessary for similar events and states of affairs to be
represented in a similar manner.
Compliance with accounting standards helps to achieve comparability by ensuring that different entities account for similar transactions and events in a
similar way.
Example:
FINANCIAL ACCOUNTING 1
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Depreciation policy must be consistent from one period to the next, unless it becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives
the most cautious presentation of the business‟s financial position or results.
IAS 1 describes the prudence concept as being that „revenue and profits are not anticipated, but are recognized by inclusion in the profit and loss
account only when realized in the form either of cash or of other assets, the ultimate cash realization of which can be assessed with reasonable certainty;
provision is made for all known…….expenses and losses whether the amount of these is known with certainty or is a best estimate in the light of the
information available.‟
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a provision should be made so that the amount in question is not
included in the profit for the year.
Objectivity:
This means that accountants must be free from bias. They must adopt a neutral stance when analyzing accounting data. This means that they should
try to strip their answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this
should be that any number of accountants will give the same answer independently of each other.
Example:
Internally generated good will should not be capitalized in the balance sheet, as its value cannot be determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful, information must be relevant to the decision-making needs of users.
Information is relevant when it has the ability to influence the decisions of users by helping them to evaluate past, present or future events or to
confirm or correct their past evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to determine if to lend to the firm or supply on credit.
Question 4
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Factors affecting materiality are:
The size of the item;
The nature of the item.
To be useful, information must be relevant to the decision-making needs of users. Information is relevant when it influences the economic decisions of
users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations.
Neutrality means that the information in financial statements should be free from deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about certain items.
The potential conflict between the two is that neutrality requires freedom from bias while the exercise of prudence is a potentially biased concept since
judgment is required.
In resolving the conflict, a balance should be found that neither overstates nor understates assets, gains, liabilities and losses.
Safeguards to ensure that a company‟s financial statements are free from material error:
The fact that the financial statements have been audited by an independent professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.
FINANCIAL ACCOUNTING 1
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LESSON FOUR
Question 1
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
£ £ £
Sales 378,500
Less returns inwards (4,100)
374,400
Less cost of sales
Opening stock 120,600
Purchases 261,700
Less returns out (7,700) 254,000
374,600
Less closing stock 102,500 272,100
Gross profit 102,300
Add
Discount received 2,400
Rent received 7,500
112,200
Less expenses
Salaries and wages 45,700
Office expenses 8,400
Insurance premiums 2,200
Electricity 2,300
Stationery 6,200
Advertising 8,900
Telephone 2,100
Business rates 6,000
Discounts allowed 600 (82,400)
Net profit 29,800
Capital 287,500
Add Net Profit 29,800
317,300
Less drawings (26,000)
291,300
Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
£ £
Sales 491,620
Less cost of sales
Opening stock 18,460
Purchases 387,936
406,396
Closing stock 19,926
386,470
FINANCIAL ACCOUNTING 1
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Working:
Depreciation charge:
Donald Brown
Balance Sheet as at 31 December 20X0
Cost Depreciation Net
Non current assets £ £ £
Fixtures and fittings 42,200 6,200 36,000
Motor vehicles 45,730 24,438 21,292
87,930 30,638 57,292
Current assets
Stock 19,926
Debtors 42,737
Prepayments 680
Cash in hand 1,411
64,754
Current liabilities
Creditors 35,404
Accruals 218
Bank overdraft 19,861
55,483
Net current assets 9,271
Net assets 66,563
Financed by
Capital 26,094
Net Profit for year 67,037
Less drawings 93,131
26,568
66,563
FINANCIAL ACCOUNTING 1
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Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
£ £
Sales 427,726
Opening stock 15,310
Purchases 302,419
Carriage inwards 476
318,205
Less closing stock 16,480
Cost of sales 301,725
Gross profit 126,001
Carriage outwards 829
Wages and salaries 64,210
Rent and rates (12,466 – 620) 11846
Heat and light (4,757 + 350) 5,107
Depreciation – equipment 10,200
Motor vehicles 8,654
Sundry expenses 8,426
109,272
Net profit for the year 16,729
Brenda Bailey
Balance Sheet as at 30 June 20X9
Cost Depreciation Net book value
Non current assets £ £ £
Equipment 102,000 32,450 69,550
Motor vehicles 43,270 17,574 25,696
145,270 50,024 95,246
Current assets
Stock 16,480
Debtors 50,633
Prepayments 620
Cash __477
68,210
Current liabilities
Bank overdraft 3,295
Creditors 41,792
Accruals 350
45,437
Net current assets 22,773
118,019
Capital
Balance at 1 July 20X8 122,890
Add Profit for year 16,729
139,619
Less drawings 21,600
Balance at 30 June 20X9 118,019
Question 4
Frank Mercer
Cash book
20X8 £ 20X8 £
Dec 31 Balance b/f 1,793 Dec 31 Bank charges 18
Dec 31 Dividend 26 Dec 31 Standing order 32
Dec 31 Direct debit 88
____ Balance c/d 1,681
1,819 1,819
£ £
Balance per bank statement 1,557
Add unrecorded lodgments:
V Owen 98
K Walters 134
232
Less unpresented cheques:
B Oliver (869) 71
L Philips (872) 37
(108)
Balance per cash book (corrected) 1,681
FINANCIAL ACCOUNTING 1
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LESSON FIVE
Question 1
Question 2
FINANCIAL ACCOUNTING 1
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Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have no effect on the control account.
(b)
Statement Of Adjustments To List Of Personal Account Balances
£ £
Original total of list of balances 12,802
Add: debit balance omitted (b) 300
debit balance understated (e) 200
500
13,302
Less: transposition error (c ): understatement of cash received 180
cash debited instead of credited (2 x £250) (h) 500
discounts received wrongly debited to Bell (i) 50
Understatement of cash received (i) _72
__802
12,500
Question 3
(a)
George – Cash book
£ £
Balance 4,890 Bank charges (3) 320
Correction of error - interest 320 Plant (4) 10,000
Balance 11,890
Cheque dishonored 980
Correction of error in
(b)
Bank reconciliation
£
Balance per bank statement 12,800
Less lodgments not credited (2) 2,890
9,910
Add: dishonored cheque 980
Add: outstanding cheque (1) 1,000
Balance per cash book - overdrawn 11,890
FINANCIAL ACCOUNTING 1
528 Revision Aid
(d)
Journal
£ £
George – drawings 870
Repairs to premises 870
Repairs to George‟s house mistakenly charged
as a business expense
*Note: a debit to accounts payable ledger control account is also acceptable for this entry.
Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale posted in a wrong debtors account (e.g. to
debtor 1 instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense of plant repair posted to the plant account
(an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a credit sale of £250 is posted to the debtor
and sales account as £520.
FINANCIAL ACCOUNTING 1
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(b)
(i)
DR (Sh) CR (Sh)
Suspense 10,000
ABD Bank – loan 10,000
Cashbook 4,000
P& L – Rent received 4,000
(ii)
Statement of Corrected net profit
(Sh) (Sh)
Net profit 64,000
Add: Rent received 4,000
Discount received 500
Prepaid insurance 220
Insurance receivable 12,000 16,720
80,720
Less: closing stock overvalued 1,500
Discount allowed 500
Opening stock 3,200 (5,200)
FINANCIAL ACCOUNTING 1
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Question 5
WORKSHEET
ACCOUNTS Pre-Adjusted Trial Adjustments Adjusted T&P&L Balance sheet
Balance Trial Balance Account
Dr Cr Dr Cr Dr Cr Dr Cr Assets Liab.
£ £ £ £ £ £ £ £ £ £
Capital 40,000 40,000 40,000
Purchases 26,154 26,154 26,154
Sales 36,246 36,246 36,246
Salaries 4,814 350 5,164 5,164
Opening stock 4,307 4,307 4,307
Insurance 820 205 615 615
Rent income 965 165 800 800
Buildings 25,000 25,000 25,000
Furniture 14,500 1,450 13,050 13,050
Debtors 6,140 307 5,833 5,833
Other expenses 1,060 1,060 1,060
Creditors 4,638 4,638 4,638
Commission 946 120 1,066 1,066
82,795 82,795
Salaries due 350 350 350
Prepaid 205 205 205
insurance
Rent rec‟d in adv. 165 165 165
Accrued 120 120 120
commission
Depreciation 1,450 1,450 1,450
Bad debts 307 307 307
Closing stock 5,008 5,008
Net profit 4,063
2,597 2,597 83,265 83,265 43,120 43,120 49,216 49,216
Column numbers 1 2 3 4 5 6 7 8 9 10
Question 6
Purpose of Control Accounts
i. To provide for arithmetic check on the postings made in the individual account i.e. either the sales ledger or the purchases ledger.
ii. To provide a quick total of the debtors and creditors balances to be shown in the trial balance.
iii. To detect and prevent errors and frauds on the debtor and creditors account.
iv. To facilitate delegation of duties especially where the debtors and creditors are many.
FINANCIAL ACCOUNTING 1
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LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets £ £
Stocks 4,500
Debtors 2,800
Rates prepaid 40
Fixtures 2,500
10,140
Liabilities
Bank overdraft (add unpresented cheques) 1,172
Accrued expenses 240
Creditors 1,800
Loan 4,000
Accrued interest [4,000 x 3% x 3/12] 30
Heating and lighting 80 (7,322)
2,818
(b)
Dare
Profit and loss account for the year ended 31 December 1996
£ £
Gross profit 9,000
Discounts received 480
9,480
Less expenses
Rent and rates 465
Fixtures and fittings (depreciation) 350
Lighting and heating 200
General expenses 450
FINANCIAL ACCOUNTING 1
536 Revision Aid
(c)
Dare
Balance Sheet as at 31 December 19X6
Non current assets £ £ £
Fixtures and fittings 2,550
Current assets
Stocks 5,800
Debtors 3,000
Prepayments 50
Bank (less unpresented cheques) 673
Cash __20
9,543
Current liabilities
Creditors 2,200
Accruals _290 (2,490)
7,053
9,603
Capital 2,818
Net profit 3,821
6,639
Less drawings (1,036)
5,603
Non current liabilities
Loan – 3% 4,000
9,603
Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
£ £
Income
Subscriptions (W1) 10,690
Bar and café profit (W2) 9,200
Sale of sportswear (W3) 1,400
Hire of sportswear (W5) 1,700
Deposit account interest 800
FINANCIAL ACCOUNTING 1
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23,790
Expenditure
Rent of clubhouse 6,000
Groundsperson 10,000
Heating oil (W6) 4,500
Depreciation 5,000 x 10% 500
(21,000)
Surplus of income over expenditure for the year 2,790
Workings:
Subscriptions
SUBSCRIPTIONS
£ £
Arrears b/f 1.1.X5 (10 + 230) 240 Advance b/f 1.1.X5 40
Subscription income for year (bal fig) 10,690 Cash received 11,000
Advance c/f 31.12X5 __200 Arrears c/f 31.12.X5 ___90
FINANCIAL ACCOUNTING 1
540 Revision Aid
11,130 11,130
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.
Sale of sportswear
£ £
Sales 5,000
Opening stock 3,000
Purchases (W4) 3,100
6,100
Closing stock (4,000)
Closing stock (2,100)
Gross Profit 2,900
Sportswear written down (1,500)
Net profit 1,400
Purchases of sportswear
£
Bank 4,500
Add closing creditors 450
Less opening creditors (300)
4,650
For sale 2/3: £3,100 For hire 1/3: £1,550
Hire of sportswear
£ £
Receipts 3,000
Costs*
Opening stock 750
Purchases (W4) 1,550
2,300
Closing stock (1,000)
(1,300)
Profit 1,700
*Note: While there is a case for treating the sportswear for hire as non current assets, in club accounts it is more usual to treat such items as stock in
trade.
FINANCIAL ACCOUNTING 1
542 Revision Aid
Heating Oil
£
Opening stock 1,000
Purchases (4,000 + 200) 4,200
5,200
Less closing stock (700)
Expense for year 4,500
Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
Raw materials
Opening stock 40,0000
Purchases 855,000
895,000
Less closing stock (80,000)
Raw materials consumed 815,000
Wages _50,000
865,000
Factory overheads
Wages 96,000
Rent and rates 22,500
Water and electricity 13,000 131,500
Cost of goods completed 996,500
Factory profit ___3,500
Transfer price 1,000,000
Sales 4,100,000
FINANCIAL ACCOUNTING 1
544 Revision Aid
Cherono
Balance Sheet as at 30 June 1998
Non current assets Cost Depreciation NBV
Fixtures and fittings 900,000 (440,000) 460,000
Motor vehicles 152,000 (38,000) 114,000
1,052,000 (478,000) 574,000
Current assets
Stock: Raw materials 80,000
Lampshades 30,000
Less UPCS (120)
Other goods 252,000 361,880
Debtors 108,000
Prepayments 10,500
Bank balance _98,000
578,380
Current liabilities
Creditors 107,000
Accruals 27,318 (134,318) 444,062
1,018,062
Capital 740,000
Add net profit 133,062
873,062
Less drawings (95,000)
778,062
Add loan _240,000
1,018,062
FINANCIAL ACCOUNTING 1
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Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
£ £
Income
Annual subscriptions (4,680 + 70 + 230 – (140 + 100)) 4,740
Entrance fees 250
Life membership fees credited (850 + 53) 903
5,893
Training ground fees (7,660 – 470 + 325) 7,515
Sales of sporting requisites 8,774
Investment interest received 626
Insurance commissions received (53 – 11 + 13) 55
Advertising revenue 603
Profit on sale of furniture (370 – 350) 20
Total income 23,486
Expenditure:
Cost of sporting requisites sold
(5,270 + 202 – 163 = 5,309 (purchases)
5,309 + 811 – 1,064 = 5,056) 5,056
Damaged stock etc 137
Wages of grounds man (250 + 3,600 – 300) 3,550
Postages (692 – 4) 688
Stationery (55 + 629 – 36) 648
Rates (300 + 846 – 380) 766
Subscriptions in arrear written off 40
World-wide Athletics Club affiliation fee 50
Training ground upkeep 1,200
Depreciation: buildings 3,500
Furniture, equipment etc
(10% x (7,900 – 800) __710
Total expenditure 16,345
Surplus of income over expenditure £7,141
FINANCIAL ACCOUNTING 1
548 Revision Aid
£48,433
FINANCIAL ACCOUNTING 1
550 Revision Aid
LESSON 7
Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
Shs Shs
Raw materials
Opening stock 100,700
Purchases 716,250
816,950
Less stock of raw materials (79,500)
Raw materials consumed 737,450
Factory wages 382,500
Prime cost 1,119,950
Add opening w/p 85,000
Less closing w/p (126,250) (41,250)
1,078,700
Factory overheads
Depreciation on plant 84,375
Factory expenses 354,000 438,375
Factory cost of completed goods 1,517,075
Add factory profit ( missing figure) 192,925
Transfer price given in the question (par) (38,000 x 45) 1,710,000
Sales 2,775,500
Cost of sales
Opening stock of finished goods 1,200,000
Transfer price 1,710,000
2,910,000
Less closing stock of finished goods (10,125,000) (1,897,500)
878,000
Add factory profit 192,925
1,070,925
Expenses
Depreciation on delivery van 80,250
Sales department wages 150,750
FINANCIAL ACCOUNTING 1
552 Revision Aid
K M K M
Drawings 15,000 125,000 Share of factory profit 154,340 38,585
Bal c/d 105,140 54,785 Balance of profit 100,800 51,200
255,140 189,785 255,140 189,785
FINANCIAL ACCOUNTING 1
554 Revision Aid
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-8
£ £ £
Sales 404,500
Less
Opening stock 30,000
Purchases 225,000
Carriage inwards 4,000 229,000
Plant depreciation 259,000
Closing stock (35,000)
Cost of sales (224,000)
Gross profit 180,500
Discount received 4,530
Interest received ____750
185,780
Expenses
Carriage outwards 12,000
Vehicle depreciation 15,000
[25% x (80,000 – 20,000)]
Depreciation of plant 20,000
[20% x 100,000]
Discounts allowed 10,000
Office expenses [30,000 + 405] 30,805
Rent, rates , heat and light [8,800 – 1,500] 7,300
Provision for bad debts increase
[(5% x 14,300) – 420] 295
(95,400)
Net profit for year 90,380
Interest charged on drawings etc
Amis 1,000
Lodge 900
Pym 720
2,620
93,000
Less
(b)
Current Accounts
A L P A L P
£ £ £ £ £ £
Balances 1,000 500 400 Appropn – salary 13,000
Drawings 25,000 22,000 15,000 - Interest 8,000 1,500 500
Appropn – interest 1,000 900 720 - Residue 35,000 21,000 14,000
Bal c/d 16,000 _____ - 11,380 Bal c/d _____- 900 ____-
43,000 23,400 27,500 43,000 23,400 27,500
Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
£‟000 £‟000
Sales 2,000
Cost of sales
Opening stock 180
Purchases 1,400
1,580
Closing stock (200)
1,380
Gross profit 620
Expenses
FINANCIAL ACCOUNTING 1
556 Revision Aid
CAPITAL ACCOUNTS
A B C A B C
£‟000 £‟000 £‟000 £‟000 £‟000 £‟000
Balances b/f 280 210
Goodwill 80 80 40 Cash 140
Balances c/f 368 242 100 Goodwill (W1) 120 80
Revaluation 48 32
448 322 140 448 322 140
Balances b/f 368 242 100
FINANCIAL ACCOUNTING 1
558 Revision Aid
CURRENT ACCOUNTS
A B C A B C
£‟000 £‟000 £‟000 £‟000 £‟000 £‟000
Drawings 28 24 15 Balances b/f 7 6
Balances c/f 82 64 5 Profit for year 98 82 20
__ __ __ Loan interest _5 __ __
110 88 20 110 88 20
Question 4
The solution provided has the workings shown beside the accounts to make the comparison easier. Remember to adhere to previous partnerships and
departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
Workings Workshop Petrol/oil Showroom Total
£ £ £ £
Sales and charges:
32,125 32,964 8,500 Cash 73,589
65,892 41,252 81,914 Credit 189,058
98,017 74,216 90,414 Total turnover 262,647
Less materials:
1,932 3,018 20,720 Opening stock 25,670
23,860 41,805 52,100 Purchases 117,765
25,792 44,823 72,820 143,435
(2,752) (2,976) (25,310) Closing stock (31,038)
23,040 41,847 47,510 Usage 112,397
(2) 34,163 5,685 ____- Direct wages 39,848
57,203 47,532 47,510 Cost of sales 152,245
40,814 26,684 42,904 Gross profit 110,402
(1) 1,333 - - Profit on sale of plant 1,333
42,147 26,684 42,904 111,735
Less
(3) 7,024 - 4,391 Indirect wages 11,415
- - 10,200 Salaries 10,200
(4) 2,613 2,945 7,880 Rates 13,438
(5) 1,939 2,185 5,846 Electricity 9,970
(6) 4,477 3,389 4,130 General expenses 11,996
FINANCIAL ACCOUNTING 1
560 Revision Aid
Less appropriations
Interest on capitals
Duke (5% x £50,0000 (2,500)
Earl (5% x £40,000) (2,000)
Residual profit* 13,692
Duke (6,846)
Earl (6,846)
-
*The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.
Aristocratic Autos
Balance Sheet as at 30 September 1986
Workings Workshop Petrol/oil Showroom Total
£ £ £ £
Non current assets at written down
value:
(8) 5,020 4,260 11,010 Freehold buildings 20,290
(8) 24,891 4,859 5,357 Plant, equipment and vehicles 35,107
29,911 9,119 16,367 55,397
Current assets:
2,752 2,976 25,310 Stocks 31,038
1,365 537 - Debtors 1,902
(4) 2,586 2,915 7,799 Prepayments 13,300
316 1,605 30,470 Bank and cash 32,391
7,019 8,033 63,579 78,631
Current liabilities:
4,225 5,602 15,250 Creditors 25,077
(9) 915 564 983 Accruals 2,462
5,140 6,166 16,233 27,539
1,879 1,867 47,346 Working capital 51,092
31,790 10,986 63,713 Net assets employed 106,489
Financed by
Capital accounts
Duke 50,000
Earl 40,000
90,000
Current accounts:
(10) Duke 6,906
(10) Earl 9,853
16,489
106,489
Workings
(1) Plant disposal: Cost 19,500
Accumulated depreciation (15,633)
FINANCIAL ACCOUNTING 1
562 Revision Aid
FINANCIAL ACCOUNTING 1
564 Revision Aid
Duke Earl
Opening balance 9,750 10,477
Interest on capital 2,500 2,000
Residual profit 6,846 6,846
Drawings (12,190) (9,740)
Closing balance 6,906 9,583
Question 5
WORKINGS
The first step is to derive the profit for the period:-
£
Closing Assets minus external liabilities
(17,000 + 3,480 + 1,100 + 2,230 + 3,370 – 980) 26,200
Add back drawings (2,000 + 1,600 + 1,800) 5,400
31,600
Opening Less assets minus external liabilities (26,060 – 820) 25,240
Profit for period (1st July to 31st October) 6,360
CAPITAL ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Goodwill w/o - 3,000 3,000 1,500 Opening balances 9,000 8,000 8,000 -
Goodwill raised 2,500 2,500 2,500 -
Closing balances - 7,500 7,500 4,000 Bank 4,000 4,000
Exors of Capital 1,500 1,500
R decd 11,500 - - - Premium (1/5 x
7,500)
11,500 10,500 10,500 5,500 11,500 10,500 10,500 5,500
CURRENT ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Balance b/d - - 100 - Balances b/d 140 200 - -
Drawings 2,000 1,600 1,800 - Appropriation a/c 2,120 2,120 2,120 -
The Capital and Current Accounts are given as workings for the Balance sheet figures.
LESSON 8
Question 1 (a)
AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31 October 1999
Raw Materials Sh‟000 Sh‟000
Opening stock – Raw material 380
Purchases – Raw material 9,500
9,880
Less closing stock – Raw material (465)
Cost of raw materials consumed 9,415
Add: direct wages 1,350
direct expenses _395 1,745
Prime Cost 11,160
Factory overheads
Factory expenses 290
Indirect materials 350
Factory insurance 150
Depreciation – plant and machinery 5,160 5,950
Total cost of production 17,110
Add opening W.I.P 560
17,670
Less closing W.I.P – Finished goods (695)
Factory cost of production – finished goods 16,975
Sales 28,550
Less cost of sales
Opening stock – finished goods 420
Factory cost of production – finished goods 16,975
17,395
FINANCIAL ACCOUNTING 1
566 Revision Aid
AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets Sh‟000 Sh‟000 Sh‟000
Land & Buildings 30,000 - 30,000
Plant and machinery 25,800 (11,460) 14,340
Furniture and equipment 890 (274) 616
Motor vehicles 16,500 (7,525) 8,975
73,190 19,259 53,931
Current Assets
Stock – Finished goods 610
Raw materials 465
WIP 695
7,360
9,130
Current Liabilities
Bank overdraft 1,175
Creditors 1,000
Accruals 783
Debenture interest 800
Dividends accrued 4,000 (7,758) 1,372
55,303
Financed by:
Authorized and issued capital 40,000
Capital reserve
Share premium 500
Revenue reserve
General reserve 2,000
Retained profit 2,803
45,303
Non current liability
8% debenture 10,000
55,303
FINANCIAL ACCOUNTING 1
568 Revision Aid
STA
Balance Sheet as at 1 November 19-6
£ £
Buildings 17,000
Equipment 3,480
20,480
Current assets
Stock 1,100
Debtors 2,230
Bank 4,950
8,280
Current liabilities
Creditors (980) 7,300
27,780
Capital: Sam 7,500
Ted 7,500
Abe 4,000
19,000
Current accounts: Sam 720
Ted 220
Abe __- 940
19,940
Estate of Reg. 7,840
27,780
FINANCIAL ACCOUNTING 1
570 Revision Aid
KK Ltd
Balance Sheet as at 31 October 1998
Shs „000‟ Shs „000‟ Shs „000‟
Non Current Assets
Freehold property 44,500 - 44,500
Furniture and fittings 1,540 (292) 1,248
Motor vehicles 3,500 (965) 2,535
49,540 (1,257) 48,283
Goodwill 500
Current Assets
Stock 4,398
Debtors 1,540
Less provision for doubtful debts (77) 1,463
Rent receivable 35
Cash at bank 10,492
16,388
Current Liabilities
Creditors 332
Accrued expenses 189
Debenture interest 350
Tax payable 8,960
Proposed dividends 4,500 (14,331) 2,057
50,840
Authorized and issued share capital 1,500,000
ordinary shares of Sh. 20 each fully paid
30,000
Capital reserves
Share premium 350
Revenue reserves
General reserve 4,500
Profit and loss account 12,490 16,990
47,340
FINANCIAL ACCOUNTING 1
572 Revision Aid
Question 3
(a)
1995 1996
Gross profit percentage
Gross profit 24,000 = 37.5% 32,400 = 30%
Sales 64,000 108,000
Current ratio
Current assets 23,900 = 1.68:1 31,000 = 1.52:1
Current liabilities 14,200 20,400
Quick ratio
Current assets less stock 23,900 – 12,000 = 0.84:1 31,000 – 15,000 = 0.78:1
Current liabilities 14,200 20,400
Gearing ratio
Loan capital 60,000____ = 70% 60,000____ = 55%
Total capital 60,000 + 26,000 60,000 + 49,000
1995 1996
£‟000 £‟000
Cost of sales 40,000 75,600
Add: closing stock 12,000 15,000
52,000 90,600
Deduct: opening stock 10,000 12,000
Purchases 42,000 78,600
(b)
The gross profit margin has fallen when compared with last year, although in absolute terms, both profit and sales are higher. Possibly the firm
has lowered the price of goods to increase sales, although there may be other explanations (see part (c) below).
There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios. However, this is no immediate cause for
concern as the company appears to be paying its creditors more promptly than last year.
The debtors‟ collection period, already satisfactory, has decreased still further from 60 to 47 days. There is not enough information to say
whether this is all due to good credit control, or whether some sales are being made on shorter credit terms or for cash.
The creditors payment period has shortened. Possibly the company has become more efficient at paying creditors, or perhaps it is purchasing
goods on shorter credit terms.
The gearing ratio has reduced but it is still too high. The reduction is mainly due to an increase in retained profits and in the revaluation
reserve. High gearing involves greater risk for the shareholders.
(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company ought to be able to pay its debts as they
fall due. However, an excessively high current ratio means that resources are tied up in stock, debtors and cash instead of producing profits. Current
assets should generally be kept as low as is compatible with efficient production and paying creditors as they fall due.
There is some truth in this statement. High gearing means greater risk, but also, in good times, greater returns. It is important that the percentage
return to shareholders is greater than the percentage rate of interest being paid on the borrowings.
Question 4
FINANCIAL ACCOUNTING 1
574 Revision Aid
Call account
19X1 19X1 £
1 May Share capital 15,000 1 May Cash 14,850
_____ 29 Sep Forfeited shares ___150
£15,000 £15,000
Forfeited Shares
19X1 19X1 £
29 Sep Call account 150 29 Sep Share capital (500 @ £1) 500
1 Nov Forfeited shares
reissued 350 ____
£500 £500
Forfeited Shares
19X1 £ 19X1 £
1 Nov Share capital 500 1 Nov Cash 400
1 Nov Share premium 250 1 Nov Forfeited shares 350
£750 £750
FINANCIAL ACCOUNTING 1
576 Revision Aid
STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I
Sh‘000’ Sh.‘000’
Revenue 816,160
Cost of sales 401,000
Wages and salaries 186,440
Operating expenses 95,860
Insurance 1,180
Directors‟ fees 960
Ordinary share capital; 5,200,000 shares of Sh.20
each fully paid 104,000
Profit and loss account, 1 November 2000 77,600
9% debenture stock – secured 160,000
Share premium 18,000
Capital redemption reserve 56,400
Trade debtors and creditors 63,860 61,520
Bad debts written off 240
Audit fees 400
Interest on loan and overdraft 13,900
Depreciation expense 17,300
Accruals 900
Interim dividends paid 26,000
Freehold land and buildings 164,600
Leasehold land and buildings (over 50 years) 125,600
Leasehold land and buildings (over 50 years) 51,900
Furniture and equipment 85,600
Stock 46,400
Prepayments 720
Bank balance 2,820
Investments 9,800
1,294,580 1,294,580
FINANCIAL ACCOUNTING 1
578 Revision Aid
1. The balances of fixed asset accounts as at the beginning of the year and additions during the year were as follows:
Cost or valuation Accumulated depreciation Additions
1 November 2000 during the year
Sh. ‘000’ Sh.‘000’ Sh.‘000’
Freehold land and buildings 157,000 7,600
Leasehold land and buildings
(over 50 years) 121,800 3,800
Leasehold land and buildings
(under 50 years) 60,200 5,800
Furniture and equipment 150,800 52,200 1,800
The company does not provide for depreciation on freehold properties or properties held on lease with 50 years or more to run at the balance
sheet date. Properties held on lease with less than 50 years to run are depreciated over the un-expired term. Items of equipment are depreciated
over their estimated useful life.
2. Some of the leasehold property in the books costing Sh.7,500,000 had just 50 years remaining on the lease in October 2000 and has not yet been
transferred to the under 50 years category.
3. Disposals during the year included the following:
All the sale proceeds have been included in the revenue: no other adjustment has been made.
The determination of depreciation expense for the year included in the trial balance above has correctly been done for those properties not
disposed and include in the under 50 years category at the beginning of the year.
1) Freehold land was revalued on an existing basis by a professional valuer but the surplus of Sh.6,000,000 has not yet been brought into account.
2) The investments in the trial balance are temporary quoted securities. As at 31 October 2001 their market value was Sh.10,500,000. Income from
the investments of Sh.450,000 is included in revenue.
3) Additional audit fees of Sh.600,000 need to be provided for.
4) The total balance of cash at bank includes Sh.1,500,000 overdraft on one of the accounts.
5) The corporation tax on the year‟s profit has been estimated at Sh.27,000,000. Corporation tax on the previous years profit was finally agreed with
the tax authorities to be Sh.310,000 more than had been provided for in the profit and loss account of the year.
6) The directors have decided to recommend a final dividend of Sh.5 per ordinary share
Required:
a) A schedule showing fixed assets movements for the year ended 31 October 2001. (10 marks)
b) Profit and loss account for the year ended 31 October 2001. (10 marks)
c) Balance sheet at 31 October 2001. (5 marks)
FINANCIAL ACCOUNTING 1
580 Revision Aid
QUESTION TWO
Rotich and Sinei have been in partnership for several years, sharing profits and losses in the ratio 2:1. Interest on fixed capitals was allowed at the rate
of 10% per annum, but no interest was charged or allowed on current accounts.
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
13,420,000 13,420,000
Additional information:
1. On 1 November 2000, Tonui was admitted as a partner and from that date, profits and losses were to be dated in the ratio 2:2:1. For the purpose
of this admission, the value of goodwill was agreed at Sh.3,000,000. No account for goodwill was to be maintained in the books, adjusting entries
for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 into the firm of which
Sh.375,000 comprised his fixed capital and the balance was credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui‟s admission. In addition, after Tonui‟s admission, no
interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated, were to be apportioned on a time
basis.
4. A charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April 2001, the stock was valued at Sh.1,275,000.
6. Salaries included the following partners‟ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh.62,500.
7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expense, which was later found to be due to the following
clerical errors:
Sales returns of Sh.32,000 had been debited to sales returns but had not been posted to the account of the customer concerned :
The purchases journal had been undercast by S.80,000.
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001
respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners‟ current accounts for the year ended 30April 2001. (4 marks)
c) Balance sheet as at 30 April 2001. (7 marks)
(Total: 20marks)
QUESTION THREE
a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account.
(6 marks)
b) The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2001:
FINANCIAL ACCOUNTING 1
582 Revision Aid
Receipts Payments
Sh. Sh.
Balance brought forward 288,000 Salaries and wages 254,000
Subscriptions: New equipment 565,000
Year 1999 2000 249,000 Repairs and
Maintenance 124,000
2000 2001 2,050,000 Office expenses 415,000
2001 2002 194,000 Printing and stationery 168,000
Dinner dance 723,000 Purchase ofBeverages 197,000
Beverage sales 657,000 Dinner dance expenses 315,000
Investments income 400,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 218,000
Investments 1,500,000
Balance carried forward 405,000
4,561,000 4,561,000
Additional information:
Required:
a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
QUESTION FOUR
a) Explain the term “bank reconciliation” and state the reasons for its preparation. (6 marks)
b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that date the bank balance was Sh.706,500 whereas his cash
book balance was Sh.2,366,500. His accountant investigated the matter and discovered the following discrepancies:
1) Bank charges of Sh.3,000 had not been entered in the cash book.
2) Cheques drawn by Ssemakula totalling Sh.22,500 had not yet been presented to the bank.
3) He had not entered receipts of Sh.26,500 in his cash book.
4) The bank had not credited Mr Ssemakula with receipts of Sh.98,500 paid into the bank on 30mJune 2001.
5) Standing order payments amounting to Sh.62.000 had not been entered into the cash book.
6) In the cash book Ssemakula had entered a payment of Sh.74,900 as Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cash
book.
8) Ssemakula had brought forward the opening cash balance of Sh.329,250 as a debit balance instead of a credit balance.
FINANCIAL ACCOUNTING 1
584 Revision Aid
9) An old cheque payment amounting to Sh.44,000 had been written back in the cash book but the bank had already honoured it.
10) Some of Ssemakula‟s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had
credited some deposits amounting to Sh.832,500 to another customer‟s account. However, acting on information from his customers,
Ssemakula had actually entered the expected receipts from the debtors in his cash book.
Required:
i) A statement showing Ssemakula‟s adjusted cash book balance as at 30 June 2001. (9 marks)
ii) A bank reconciliation statement as at 30 June 2001. (5 marks)
(Total: 20 marks)
QUESTION FIVE
The accounting profession has for a long time relied on certain accounting conventions to guide accounting practice. Yet the application of the same
conventions has been the source of criticism of the quality and relevance of information contained in financial reports.
Some of these conventions include:
Required:
For each of the principles listed above:
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
FINANCIAL ACCOUNTING 1